The Emergence of a Price System from Decentralized Bilateral Exchange Herbert Gintis ∗ September 8, 2006 Abstract This paper analyzes the dynamics of completely decentralized bilateral ex- change. In such a framework, neither money nor prices as public information exist. Rather, prices represent an agent’s barter strategy, and hence are private information. We call these private prices. Agents formulate trade offers and accept or reject offers from other traders, on the basis of their private prices. Private prices are updated by low-scoring agents periodically imitating the strategies of higher-scoring agents. We show that a system of quasi-public prices emerges in the medium run, and these quasi-public prices converge to stationary distributions that are approximately competitive equilibria of the underlying Walrasian model in the long run. We thus provide, for the first time, a general, decentralized disequilibrium adjustment mechanism that ren- ders market equilibrium dynamically stable in a highly simplified production and exchange economy. Journal of Economic Literature Classifications: D51—Exchange and Production Economies D58—Computable and Other Applied General Equilibrium Economies D82—Asymmetric and Private Information ∗ I would like to thank the John D. and Catherine T. MacArthur Foundation for financial support. The computer algorithms used in this paper are available from the author. Affiliations: Santa Fe Institute and Central European University 1