Testing the Hayek hypothesis: Recent theoretical and experimental evidence
Department
Economics, Finance and Quantitative Analysis
Document Type
Article
Publication Date
7-1-2022
Abstract
Economists well understand that the work of Friedrich Hayek contains important theoretical insights. It is less often acknowledged that his work contains testable predictions about the nature of market processes. Vernon Smith termed the most important one the ‘Hayek hypothesis’: that gains from trade can be realized in the presence of diffuse, decentralized information, and in the absence of price-taking behavior and centralized market direction. Vernon Smith tested this prediction by surveying data on laboratory experimental markets and found strong support. We extend Smith’s work first by showing how subsequent theoretical advances provide a theoretical foundation for the Hayek Hypothesis. We then test the hypothesis using recent field experimental market data. Using field experiments allows us to test several other predictions from Hayek, such as that market experience increases the realized gains from trade. Generally speaking, we find support for Hayek’s theories.
Journal Title
PLoS ONE
Journal ISSN
1932-6203
Volume
17
Issue
7 July
Digital Object Identifier (DOI)
10.1371/journal.pone.0270489