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Managing rational routes to randomness

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  • Schmitt, Noemi
  • Westerhoff, Frank

Abstract

Within the seminal cobweb model of Brock and Hommes, firms adapt their price expectations by a profit-based switching behavior between free naïve expectations and costly rational expectations. Brock and Hommes demonstrate that fixed-point dynamics may turn into increasingly complex dynamics as the firms' intensity of choice increases. We show that policy-makers are able to manage rational routes to randomness by adjusting profit taxes. As suggested by our analytical and numerical analysis, policy-makers should increase (decrease) profit taxes if destabilizing expectations generate higher (lower) profits than stabilizing expectations to alter the composition of applied expectation rules and thereby to promote market stability. Our results are not restricted to cobweb models: a huge body of literature demonstrates that rational routes to randomness may emerge in many different markets.

Suggested Citation

  • Schmitt, Noemi & Westerhoff, Frank, 2015. "Managing rational routes to randomness," BERG Working Paper Series 96, Bamberg University, Bamberg Economic Research Group.
  • Handle: RePEc:zbw:bamber:96
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    References listed on IDEAS

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    Cited by:

    1. Schmitt, Noemi & Tuinstra, Jan & Westerhoff, Frank, 2017. "Side effects of nonlinear profit taxes in an evolutionary market entry model: Abrupt changes, coexisting attractors and hysteresis problems," Journal of Economic Behavior & Organization, Elsevier, vol. 135(C), pages 15-38.
    2. Schmitt, Noemi & Tuinstra, Jan & Westerhoff, Frank, 2017. "Stability and welfare effects of profit taxes within an evolutionary market interaction model," BERG Working Paper Series 122, Bamberg University, Bamberg Economic Research Group.

    More about this item

    Keywords

    cobweb models; discrete choice approach; intensity of choice; profit taxes; stability analysis; policy implications;

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices

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