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The Hayek hypothesis and long run competitive equilibrium: an experimental investigation

Author

Listed:
  • Jason Shachat

    (The Wang Yanan Institute for Studies in Economics, and MOE Key Laboratory in Econometrics, Xiamen University)

  • Zhenxuan Zhang

    (The Wang Yanan Institute for Studies in Economics, and MOE Key Laboratory in Econometrics, Xiamen University)

Abstract
We report on an experiment investigating whether the Hayek Hypothesis (Smith, 1982) extends to the long run setting. We consider two environments; one with a common production 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 realize 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 efficiency when markets use continuous double auctions.

Suggested Citation

  • Jason Shachat & Zhenxuan Zhang, 2012. "The Hayek hypothesis and long run competitive equilibrium: an experimental investigation," Working Papers 1201, Xiamen Unversity, The Wang Yanan Institute for Studies in Economics, Finance and Economics Experimental Laboratory, revised 29 Jun 2013.
    • Handle: RePEc:fee:wpaper:1201
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Pan, Jinrui & Shachat, Jason & Wei, Sijia, 2018. "Cognitive stress and learning Economic Order Quantity (EOQ) inventory management: An experimental investigation," MPRA Paper 93214, University Library of Munich, Germany.
    2. Jinrui Pan & Jason Shachat & Sijia Wei, 2022. "Cognitive Stress and Learning Economic Order Quantity Inventory Management: An Experimental Investigation," Decision Analysis, INFORMS, vol. 19(3), pages 229-254, September.
    3. Konstantinos Georgalos & John Hey, 2020. "Testing for the emergence of spontaneous order," Experimental Economics, Springer;Economic Science Association, vol. 23(3), pages 912-932, September.
    4. Jinrui Pan & Jason Shachat & Sijia Wei, 2020. "Cognitive reflection and economic order quantity inventory management: An experimental investigation," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 41(6), pages 998-1009, September.
    5. Manahov, Viktor & Hudson, Robert & Hoque, Hafiz, 2015. "Return predictability and the ‘wisdom of crowds’: Genetic Programming trading algorithms, the Marginal Trader Hypothesis and the Hayek Hypothesis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 37(C), pages 85-98.
    6. Christian A. Conrad, 2022. "The Effects of Demand and Interest Rates on Investments, Evidence of Overinvestment from Two Behavioral Experiments," Applied Economics and Finance, Redfame publishing, vol. 9(1), pages 19-28, December.

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    More about this item

    Keywords

    Experiment; Double Auction; Hayek Hypothesis; Long Run Equilibrium; Bounded Rationality;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact

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