A Review of
“Allocative Efficiency of Markets with Zero-Intelligence Traders: Market as a PartialSubstitute for Individual Rationality” Dhananjay K. Gode and Shyam Sunder
Through this paper the authors Dhananjay Gode and Shyam Sunder try to understand the effect of various elements such as institutional structure, market environment, and agent behaviour which effect the performance of an economy on the allocative efficiency of a double auction. Through their experiment they prove that a double auction, a non-Walrasian market mechanism, can sustain high levels of allocative efficiency even if agents do not maximize or seek profits. Since It is not possible to control the trading behavior of individuals as the human traders differ in their expectations, attitudes toward risk, preferences for money versus enjoyment of trading as a game, and many other respects. Hence in their experiment they replaced human traders by computer programs in order to separate the joint effects of those variations, unobservable to the researcher, can be mitigated by studying market outcomes with participants who follow specified rules of behavior. In order to achieve this isolation of the effect of the effect of market rules and agent behavior on market performance, they proceed in three steps. First, they select two types of market participants: profit-motivated human traders and "zero-intelligence" (ZI) machine traders.' Second, they observe the performance of a double auction with human traders and with ZI traders. In one set of ZI markets, the traders are subject to the budget constraint; in the second set of ZI markets, the budget constraint is absent. Third, they compare these observations to isolate the performance characteristics of the markets, which can be attributed to their structure. The experiment was conducted in 5 different kinds of markets. The 5 situations are based on the five sets of demand and supply schedules to yield a broad range of equilibrium prices. Some...
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