Abstract
The idea that markets might aggregate and disseminate
information and also resolve conflicts is central to
the literature on decentralization (Hurwicz, 1972) and
rational expectations (Lucas, 1972). We report on three
series of experiments all of which were predicted to
have performed identically by the theory of rational
expectations. In two of the three series (one in which
participants trade a complete set of Arrow-Debreu
securities and a second in which all participants have
identical preferences), double auction trading leads to
efficient aggregation of diverse information and
rational expectations equilibrium. Failure of the third
series to exhibit such convergence demonstrates the
importance of market institutions and trading
instruments in achievement of equilibrium.
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