Transfer paradox happens among real people in a three-agent pure exchange economy.

What is it about?

The transfer paradox, whereby a transfer of resources that influences the equilibrium price benefits the donor while harming the recipient, is a classic paradox in general equilibrium theory. This paper pursues an experimental investigation of the transfer paradox using a three-agent pure exchange economy that is predicted to have such a paradox. The results indicate that an endowment adjustment among agents influences the market price, and consequently the donors benefit from the transfer, consistent with the competitive equilibrium theory. When given an option to make a transfer, half of donor agents voluntarily decide to adjust the endowment distribution.

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Photo by Pawel Czerwinski on Unsplash

Photo by Pawel Czerwinski on Unsplash

Why is it important?

The experiment results reveal that endowment adjustments in a pure exchange economy influence the market prices as the theory suggests. This results in the donor earning a higher payoff post-adjustment. These findings lend support to the predictive power of the competitive equilibrium theory and the possible existence of the transfer paradox in the real world.