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Repeated Choices under Dynamic Externalities

  • Giulio Bottazzi
  • Angelo Secchi

We consider an economy in which a heterogeneous population of agents have to choose among a common set of alternatives. The utilities associated to the different alternatives posses a common component and an individual component, which reflect differences in the underlying structure of agents preferences. The common components are characterized by a fixed term which describe the intrinsic utility of each choice, and by a social component which depends on the actual distribution of agents across the different alternatives. We analyze the case of linear positive externalities. Assuming a simple Markovian process for the revision of the selection process, we derive the equilibrium distribution of the population of agents. We analyze in details the extremal cases of few choices and large population of agents. The proposed models can be applied to different domains of economics, like technological adoption, location of production activities, co-evolution of business models or financial decision rules. The resulting self-reinforcing dynamics can be considered an alternative formulation of the Polya urn scheme developed by Brian Arthur et al. (1986) when the possibility of choice revision is taken into account. We analyze the differences and similarity of the two approaches.

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Paper provided by Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy in its series LEM Papers Series with number 2007/08.

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Date of creation: 01 Mar 2007
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Handle: RePEc:ssa:lemwps:2007/08
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  1. Jaibi, M. Raouf & ten Raa, Thijs, 1998. "An asymptotic foundation for logit models," Regional Science and Urban Economics, Elsevier, vol. 28(1), pages 75-90, January.
  2. Giulio Bottazzi & Giovanni Dosi & Giorgio Fagiolo & Angelo Secchi, 2007. "Modeling industrial evolution in geographical space," Journal of Economic Geography, Oxford University Press, vol. 7(5), pages 651-672, September.
  3. Durlauf, S.N., 1992. "A Theory of Persistent Income Inequality," Papers 47, Stanford - Institute for Thoretical Economics.
  4. Topa, Giorgio, 1997. "Social Interactions, Local Spillovers and Unemployment," Working Papers 97-17, C.V. Starr Center for Applied Economics, New York University.
  5. Arthur, W. Brian, 1990. "'Silicon Valley' locational clusters: when do increasing returns imply monopoly?," Mathematical Social Sciences, Elsevier, vol. 19(3), pages 235-251, June.
  6. Dosi, Giovanni & Ermoliev, Yuri & Kaniovski, Yuri, 1994. "Generalized urn schemes and technological dynamics," Journal of Mathematical Economics, Elsevier, vol. 23(1), pages 1-19, January.
  7. Brock, William A & Durlauf, Steven N, 2001. "Discrete Choice with Social Interactions," Review of Economic Studies, Wiley Blackwell, vol. 68(2), pages 235-60, April.
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