The Google thought experiment: rationality, information and equilibrium in an exchange economy

Overview & Synopsis

Following Becker (1962), an information-theoretical thought experiment is developed to investigate whether the equilibrium properties of an exchange economy depend on the rational behaviour of agents. Transactions are logged through a communication channel into an external observer's dataset, represented by Google. At some point this data connection fails and Google no longer receives the updates encoding the transactions. It is shown that Google can nevertheless make sharp predictions concerning the state of the economy. In particular, a stable long run distribution of endowments is expected, as well as a set of price-like variables. By construction this prediction does not rest on the rationality of agents, because the information-theoretical setting forces Google to treat the missed updates as random variables.