Naturally occurring preferences and general equilibrium: a laboratory study

We examine whether economies constructed using experimentally measured preferences (for risk) tend to suffer from aggregation pathologies (like non-existence and multiplicity of equilibrium) cautioned by the Sonnenschein-Mantel-Debreu theorem. We show that aggregation pathologies should be expected to arise frequently in homogeneous exchange economies, but dwindle and eventually disappear as economies grow diverse. When subjects actually trade, general equilibrium predictions are accurate in most cases, and the failures occur only in economies a priori classifi ed as fragile to preference instability. Our study uses individual-level experimental data to address longstanding questions in general equilibrium theory that are unanswerable using prior methods.