Decentralised exchange, out-of-equilibrium dynamics and convergence to efficiency

In this paper, we study out-of-equilibrium dynamics with decentralised exchange (bilateral bargaining between randomly matched pairs of agents). We characterise the conditions under which out-of-equilibrium trading converges to efficient allocations when agents are myopic, have limited information and incur utility losses relative to current holdings by engaging in (bounded) experimentation. We show, numerically, that the rate of convergence to efficient allocations is exponential across a variety of different settings where agents’ preferences can be represented by a Cobb–Douglas utility function. Finally the results are generalised to explicit exchange networks.

► We study the out-of-equilibrium dynamics of decentralised bilateral exchange. ► We characterise the limiting properties and derive results for convergence. ► We examine numerically the speed of convergence and changes in wealth. ► Via a network model of trading links we examine the effect of network structure. ► We derive analytical results for trade on a network.