Equilibrium Selection in an Experimental Macroeconomy

In this paper we report the results of an experiment designed to study the behavior of a laboratory macroeconomy with two stable steady states. The economy has the structure of an optimal growth model in which resources are allocated between consumption and investment over a sequence of time periods. The economy is decentralized, with a market for capital in operation. We find that the economy often falls into the Pareto-inferior steady state, which can be viewed as a poverty trap. The initial endowment of capital stock is varied as a treatment variable in the experiment, and the economy is more likely to reach the optimal steady state when its initial endowment is high than when it is low. Organizing the economy with a central planner directing economic activity fails to induce it to reach the optimal steady state.