Premium
NATURALLY OCCURRING PREFERENCES AND GENERAL EQUILIBRIUM: A LABORATORY STUDY
Author(s) -
Crockett Sean,
Friedman Daniel,
Oprea Ryan
Publication year - 2021
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12500
Subject(s) - general equilibrium theory , economics , homogeneous , a priori and a posteriori , econometrics , mathematical economics , preference , incomplete markets , microeconomics , statistical physics , physics , philosophy , epistemology
We examine whether economies constructed using experimentally measured preferences (for risk) tend to suffer from aggregation pathologies (like nonexistence and multiplicity of equilibrium) cautioned by the Sonnenschein–Mantel–Debreu theorem. We show that aggregation pathologies should be expected to arise frequently in homogeneous exchange economies, but dwindle and eventually disappear as economies grow diverse. When subjects actually trade, general equilibrium predictions are accurate in most cases, and the failures occur only in economies a priori classified as fragile to preference instability. Our study uses individual‐level experimental data to address longstanding questions in general equilibrium theory that are unanswerable using prior methods.