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Adaptive expectations and cobweb phenomena: Does heterogeneity matter?

  • Colucci, Domenico
  • Valori, Vincenzo

This paper studies a cobweb-type commodity market characterized by a strictly monotone demand and supply, in which n types of firms operate. Types differ in a key parameter governing price expectations which are supposed to be adaptive. The unique steady state of the resulting economic dynamics is characterized in terms of stability and the impact of the number of firms types is studied: to this end the notions of structural and behavioural degree of instability, which are introduced in the paper, prove to be crucial in determining whether stability or instability prevail. The case of market integration is also considered and conditions to have stability (or instability) in terms of the original markets' parameters are given. The baseline structure is extended in two directions. The first extension assumes the point of view of an authority who is uncertain about the firms types. In this case the structural degree of instability determines how heterogeneity affects the probability of ending up with a stable outcome. The second extension consists in endogenizing the choice of predictors through a discrete choice-based evolutionary mechanism. In both cases the amount of the heterogeneity and its possible variations play a critical role in shaping the range of possible long-run outcomes of the model.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 35 (2011)
Issue (Month): 8 (August)
Pages: 1307-1321

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Handle: RePEc:eee:dyncon:v:35:y:2011:i:8:p:1307-1321
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