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Behavioural Heterogeneity under Evolutionary Pressure: Macroeconomic Implications of Costly Optimisation

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  • Sethi, Rajiv
  • Franke, Reiner

Abstract

A model is developed in which a continuum of agents makes interdependent output decisions in a stochastic environment characterized by strategic complementarity. Two groups are distinguished: naive agents follow a costless adaptive expectations rule, while sophisticated agents incur an optimization cost to achieve self-fulfilling expectations. The paper studies the dynamics generated as the population composition evolves under pressure of differential payoffs. Sophisticated agents are favored if optimization is cheap or the stochastic environment highly variable but naive agents generally persist. A higher long-run share of sophisticated agents is associated with greater output variability and low output persistence. Copyright 1995 by Royal Economic Society.

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  • Sethi, Rajiv & Franke, Reiner, 1995. "Behavioural Heterogeneity under Evolutionary Pressure: Macroeconomic Implications of Costly Optimisation," Economic Journal, Royal Economic Society, vol. 105(430), pages 583-600, May.
  • Handle: RePEc:ecj:econjl:v:105:y:1995:i:430:p:583-600
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    1. Panagariya, Arvind & Shah, Shekhar & Mishra, Deepak, 2001. "Demand elasticities in international trade: are they really low?," Journal of Development Economics, Elsevier, vol. 64(2), pages 313-342, April.
    2. Mohammad Kabir & Ruhul Salim, 2011. "Analysing Potential Effects of Preferential Liberalisation in Some Asian Emerging Economies," International Economic Journal, Taylor & Francis Journals, vol. 25(2), pages 191-213.
    3. Thomas F. Rutherford & David Tarr, 2017. "Regional Trading Arrangements for Chile: Do the Results Differ with a Dynamic Model?," World Scientific Book Chapters,in: Trade Policies for Development and Transition, chapter 18, pages 415-437 World Scientific Publishing Co. Pte. Ltd..
    4. J.M. Ananda Jayawickrama, 2009. "Modelling Trade Sector and Trade Shocks in a Small Open Economy," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 10(1), pages 81-103, January.
    5. Harrison, Glenn W. & Rutherford, Thomas F. & Tarr,David & Gurgel, Angelo, 2003. "Regional, multilateral, and unilateral trade policies on MERCOSUR for growth and poverty reduction in Brazil," Policy Research Working Paper Series 3051, The World Bank.
    6. Ernesto Valenzuela & Kym Anderson & Thomas Hertel, 2008. "Impacts of trade reform: sensitivity of model results to key assumptions," International Economics and Economic Policy, Springer, vol. 4(4), pages 395-420, February.
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