AcademicsWorking Papers

The Hayek Hypothesis and Long Run Competitive Equilibrium: An Experimental Investigation
Jason Shachat, Zhenxuan Zhang
#002051 20131014 (published)
We report on an experiment investigating whether the Hayak Hypothesis (Smith, 1982)extends to the long run setting. We consider two environments; one with a common pro-duction technology having a U-shaped long run average cost curve and a single competitive equilibrium, and another with a common constant returns to scale technology having a constant long run average cost curve and multiple competitive equilibria. While there is convergence in both environments to the long run equilibrium, it takes longer and is less robust than usually observed in the short run setting. We show that price formation is adaptive and quickly converges to realized short run equilibrium, but long run investment decisions exhibit very limited rationality. We present and estimate an investment choice model that shows that only minimal rationality, coupled with repeated decisions, is enough to achieve high long run allocative eciency when markets use continuous double auctions.
JEL-Codes: C92; D02
Keywords: Experiment; Double Auction; Hayek Hypothesis; Long Run Equilibrium; Bounded Rationality


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