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The opposite effect of rational expectations and differentiated information costs for heterogeneous fundamentalists on the stability of an evolutive Muthian cobweb model

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  • Ahmad Naimzada
  • Marina Pireddu

Abstract

We extend the evolutionary cobweb setting proposed in Hommes and Wagener (2010), in which the share updating mechanism is based on a comparison among the profits realized by the various kinds of agents, by assuming that the market is populated by rational producers, endowed with perfect foresight expectations about prices, in addition to biased and unbiased fundamentalists. Moreover, we suppose that agents face heterogeneous information costs, that are proportional to their rationality degree. Since introducing rational agents enlarges the stability region of the steady state, while considering diversified information costs for fundamentalists shrinks it, we analyze whether one of the two aspects always prevails over the other one when they are jointly taken into account. We also investigate if the chaotic phenomena emerging when enriching the original framework in Hommes and Wagener (2010) with rational agents persist or are inhibited by the introduction of information costs for all agent types. We complete our analysis by studying the network of the relationships among the four settings obtained possibly considering information costs for biased and unbiased fundamentalists and possibly introducing rational agents.

Suggested Citation

  • Ahmad Naimzada & Marina Pireddu, 2021. "The opposite effect of rational expectations and differentiated information costs for heterogeneous fundamentalists on the stability of an evolutive Muthian cobweb model," Working Papers 460, University of Milano-Bicocca, Department of Economics, revised Dec 2021.
    • Handle: RePEc:mib:wpaper:460
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    References listed on IDEAS

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    1. Hommes, Cars & Wagener, Florian, 2010. "Does eductive stability imply evolutionary stability?," Journal of Economic Behavior & Organization, Elsevier, vol. 75(1), pages 25-39, July.
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    More about this item

    Keywords

    Muthian cobweb framework; discrete choice model; differentiated information costs; local stability; chaotic behavior.;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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