Walrasian Sequential Equilibrium, Bounded Rationality, and Social Experiments

Xiaokai Yang

Department of Economics, Monash University
Email: xiaokai.yang@buseco.monash.edu.au

and

Shuntian Yao

School of Economics and Finance, Victoria University of Wellington, New Zealand
Email: shuntianyao@netscape.net

This Draft: August 2000

Abstract
In the paper, the concept of Walrasian sequential equilibrium is developed to formalize the notions of fundamental social and endogenous uncertainties and entrepreneurial discovery. It predicts that social sequential experiments with efficient as well as inefficient network patterns of division of labor can gradually acquire organization information for society as a whole. The experiment process is decentralized and based on individuals' bounded rationality. In this process, each individual never knows others' characteristics, although all players collectively learn abstract organization information carried by price signals gradually. This paper proves an existence theorem of equilibrium for a general class of well-closed Walrasian sequential equilibrium models and avoids the recursive paradox in the presence of individual bounded rationality.

JEL Classification: D11, D50, D51.

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