Interaction and Market Structure: Essays on Heterogeneity in Economics

301 Pages·2000·11.396 MB·English

by  Domenico Delli Gatti, Mauro Gallegati, Alan P. Kirman (auth.), Prof. Domenico Delli Gatti, Prof. Mauro Gallegati, Prof. Alan Kirman (eds.)

Lecture Notes in Economics
and Mathematical Systems 484
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Springer-V erlag Berlin Heidelberg GmbH
Domenico Delli Gatti Mauro Gallegati
Alan Kirman (Eds.)
Interaction and
Market Structure
Essays on Heterogeneity in Economics
Springer
Editors
Prof. Domenico Delli Gatti Prof. Alan Kirman
Catholic University of Milan EHESS, IUF,
ITEMQ Universite d'Aix-Marseille III
Largo Gemelli, 1 GREQAM
20123 Milan, Italy 2 Rue de la Charite
13002 Marseille, France
Prof. Mauro Gallegati
DSGSS
Viale Cruci oIi, 120
64100 Teramo, Italy
Library of Congress Cataloging-in-Publication Data
Interaction anei market structure : essays on heterogeneity in economics / Domenico
Delli Gatti, Mauro Gallegati, Alan K.irman (Eds.).
p. cm. - (Lecture notes in economics anei mathematica1 systems ; 484)
Includes bibliographica1 references (p. ).
ISBN 978-3-540-66979-1 ISBN 978-3-642-57005-6 (eBook)
DOI 10.1007/978-3-642-57005-6
1. Economics--Mathematica1 models. 2. Markets--Mathematica1 models. 1. Delli Gatti,
Domenico. II. Gallegati, M. (Mauro) ill. K.irman, A. P. IV. Series.
HB135 .1552000
330'.01'l--dc21
99-462210
ISSN 0075-8442
ISBN 978-3-540-66979-1
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Contents
Introduction
Domenico Delli Gatti, Mauro Gallegati, Alan P.Kirman ................. .
Learning to Trade and Mediate
Herbert Dawid .................................................... ............... 9
Learning to Be Loyal. A Study of the Marseille Fish Market
Alan P.Kirman, Nicolaas 1. Vriend ........................................... 33
On New Phenomena in Dynamic Promotional Competition
Models with Homogeneous and Quasi-Homogeneous Firms
Michael Kopel, Gian Italo Bischi, Laura Gardini ......................... 57
A Reconsideration of Professor Iwai's Schumpeterian Dynamics
Reiner Franke. . . . . .. . .. . . . .. . .. . . ... . . .. . . .. . . ... . . ..... .. . . .. . . . . . . . ... . . .... . . 89
Agents' Heterogeneity, Aggregation, and Economic Fluctuations
Domenico Delli Gatti, Mauro Gallegati, Antonio Palestrini .. ........... 133
The Dynamic Interaction of Rational Fundamentalists and Trend
Chasing Chartists in a Monetary Economy
Carl Chiarella, Alexander Khomin ......................... ...... ........ .... 151
Self-Organization in Global Stochastic Models
of Production and Inventory Dynamics
Sergio Focardi, Michele Marchesi .............. .............................. 167
VI Contents
Heterogeneous Agents, Complementarities and Diffusion
Do Increasing Returns Imply Convergence
to International Technological Monopolies?
Andrea Bassanini, Giovanni Dosi ........................................... 185
Market Organization: Noncooperative Models of Coalition Formation
Sylvie Thoron ................................................................... 207
Evolutionary Selection of Correlation Mechanism
for Coordination Games
Angelo Antoci, Marcello Galeotti, Pier Luigi Sacco ...................... 225
The Propagation of Cooperation in a Spatial Model
of Learning with Endogenous Aspirations
Paolo Lupi ...................................................................... 235
Expectation Formation in a Cobweb Economy:
Some One Person Experiments
Cars Hommes, Joep Sonnemans, Henk van de Velden ................... 253
Fecund, Cheap and Out of Control:
Heterogeneous Economic Agents as Flawed
Computers vs. Markets as Evolving Computational Entities
Phillip Mirowski, Koye Somefun ....... ........... ............ ... ............ . . . .. . . .. 267
Introduction
Domenico Delli Gatti!, Mauro GallegatF, Alan P. Kirman3
! ITEMQ, Catholic University, Milan, Italy
2 MET, University of Teramo, Italy
3 GREQAM, Universite d'Aix-Marseille, Ecole des Hautes Etudes en Sciences
Sociales, and Institut Universitaire de France
The economics of heterogeneity
This volume contains a set of papers which pursue the aim of examining how the
properties of aggregate economic variables are influenced by the actions and
interactions of individuals. This has been the central theme of a series of
workshops held at the University of Ancona, Italy, since 1996, whose general title
is Workshops on Economics with Heterogeneous Interactive Agents (WEHIA for
short).!
Considering the economy as a complex evolving system of interacting agents, one
has to take seriously three fundamental issues:
• the heterogeneity of the agents in the economy,
• the ways in which agents interact,
• the dynamic process which governs the evolution of the individual and the
aggregate variables.
The third issue concerns especially the idea that agents learn and adapt rather than
calculate optimally (Anderson et aI., 1988; Arthur et aI., 1997; Allen, 1988.)
As to the first issue, general equilibrium theory allows, of course, agents to be as
heterogeneous as one wants but as the Sonnenschein-Mantel-Debreu results have
I The papers published in this book are a selected sample of the papers presented at the 3rd
WEHIA workshop held at the University of Ancona on May 29-30,1998.
The SIEC (Social Interaction Economics and Computing) Group, at the Dipartimento di
Economia, Universita di Ancona, manages a web site (http://www.econ.unian/ospitilsiec/)
in which one can find papers from the WEHIA 1996-99 workshops. The papers presented
at the first workshop are now in M.Gailegati and A.P.Kirman, eds., Beyond the
Representative Agent, Elgar, 1999.
2 Domenico Delli Gatti et al.
shown we can say nothing about the stability nor the consequences of the
equilibrium and it thus remains a highly abstract concept. The general equilibrium
theorist may not feel at ease with the representative agent assumption because
some of the assumptions about individuals which form the building blocks of
general equilibrium theory do not hold for the average or representative agent (the
"Weak Axiom of Revealed Preference" does not hold in the aggregate for
example). Furthermore, Arrow (1951) has shown that the proposition according to
which the properties of an aggregate function will reflect those of the individual
function has no theoretical foundations.
Coming to the second issue, in the Arrow-Debreu benchmark model, agents
interact only through the price system and this removes much of the interest of the
model as a description of a real-world economy. Thus, ignoring heterogeneity may
lead to a fallacy of composition when agents' decisions are not perfectly
synchronised (so that composition effects arise, see Caballero, 1992). This
undermines the theoretical model and distorts the empirical analysis. Game theory,
on the other hand, which might seem to be an attractive alternative, has tended to
restrict itself to very restrictive cases in which agents interact strategically in a
very sophisticated way (Kirman, 1999). Main stream economic theorising seems
to have got itself into a cui de sac, and more and more economists reject the
straightjacket of the "representative agent" acting in a world capable of
functioning, by optimally allocating resources, but not of evolving through agents'
interaction.
The representative agent framework has been one of the most successful tools in
economic theory, even if its fate has been paradoxical (Scholb, 1998). As Stoker
(1993: 1829) notes, "it has proved a tremendous engine for the development of
rational choice models over the last two decades, and their empirical application
has developed into an ideology for judging aggregate data models". It is the
cornerstone of the microfoundations of mainstream macroeconomic literature,
since the aggregation process is very simple and allows one to rule out any
difference between the behaviour of individually optimising agents and that of the
aggregate.2 If this procedure were correct, the behaviour of the aggregate variable
would simply be the reproduction on a larger scale of individual optimising
behaviour. Once the search for the elementary particles and their laws of
functioning was crowned with success these principles could be applied to
aggregate behaviour, analogously to the methodology of the hard sciences before
the quantum revolution. However, one of the achievements of the latter has been
the rebuttal of the notion that aggregate behaviour can be explained on the basis of
the behaviour of a single unit: the elementary particle does not even exist as a
single entity but as a network, a system of interacting units (Capra, 1996).
2 The conditions for exact aggregation are very restrictive; see e.g. Martel, 1996.
Introduction 3
The analysis of heterogeneity and interaction leads to a rebuttal of the standard
view of what are appropriate microfoundations since one cannot explain aggregate
dynamics as the sum of the behaviour of individuals: in fact, because interaction is
a sort of externality, the aggregate is different from the sum of its parts and the
aggregate network determines individual behaviour. Despite its success,
economists are growing more and more dissatisfied with the representative agent
framework (Kirman, 1992). Empirical analysis at the panel data level has shown
that heterogeneity matters and aggregation of heterogeneous agents is of central
relevance, since there is systematic evidence of individual differences in economic
behaviour (Stoker, 1993) and neglecting heterogeneity in aggregate equations
generates spurious evidence of dynamic structure. Moreover, aggregation of very
simple individual behaviour may lead to aggregate complex dynamics (Lippi,
1988; Lewbel, 1992.)
Therefore there are theoretical as well as empirical reasons to question the
reliability of the representative agent and the literature on heterogeneous agent is
thus burgeoning in several fields, from distribution to economic policy, to
employment, capital market imperfections and dynamics (Rloss-Rull, 1995; Delli
Gatti and Gallegati, 1999). In particular, the assumption of a constant distribution
of income, wealth or endowments over time, which is fundamental to achieving
exact aggregation of identical agents, is quite implausible when coping with
dynamics: In a sense, agents' heterogeneity is the logical requirement for dynamic
analysis.
The papers here examine situations in which the organisation of the economy
reflects the direct interaction of the agents, in which agents are only limitedly
rational and where the structure of the aggregate evolution may be very different
from that ofthe evolution of individual behaviour.
Perhaps the easiest way to situate these papers is to think of the opposite point of
view according to which the behaviour of the economy is described by that of a
"representative agent". The basic point of view here is that a complex system such
as an economy does not generate aggregate behaviour which is simply related to
individual behaviour: aggregate dynamics and individual heterogeneity are
intertwined.
Outline of the book
We will now briefly review the contributions in the book and show how they
reflect some common themes.
Dawid in Learning to Trade and Mediate examines a situation in which agents can
either produce and trade or mediate. He shows using simulations that both direct
trading and trade via specialised mediators can arise. Thus, an economy organises
4 Domenico Delli Gatti et al.
itself and speculates even though agents are homogeneous to start with. The
agents in the model are of two types, yet three types emerge. As in many papers in
this spirit agents have very simple learning rules yet the economy as a whole
develops considerable structure.
Kirman and Vriend in Learning to be Loyal: A Study of the Marseille Fish Market,
build a simple model of a wholesale market for a perishable good. The agents are
either sellers or buyers. Yet using reinforcement learning agents learn to behave
differently and reproduce many of the features of the real market analyzed. Price
dispersion, loyalty and differentiated treatment of buyers all appear. Once again,
market structure emerges as agents co-evolve.
Bischi, Gardini and Kopel in the paper On New Phenomena in Dynamic
Promotional Competition Models with Homogeneous and -Quasi Homogeneous
Firms study a market in which firms compete for market shares. They modify
their sales effort by means of a simple updating rule which takes into account the
results achieved in previous proofs. Even though firms are homogeneous the
evolution of market share over time can exhibit very complicated behaviour. Thus,
asymmetric results may occur even though agents are originally symmetric.
Heterogeneity here is endogenous rather than assumed, it emerges from the
interaction between individuals.
The theme of endogenous heterogeneity is taken up by Franke in A
Reconsideration of Professor Iwai's Schumpeterian Dynamics. He develops an
early model of Iwai and shows that the dynamics of an economy in which
innovations and diffusion of innovation are occurring will not lead to an
equilibrium in which all firms adopt the most efficient technique available. Instead
a non degenerate spectrum of techniques will persist.
Delli Gatti, Gallegati and Palestrini in Agents' Heterogeneity, Aggregation and
Economic Fluctuations show how heterogeneity endogenously arises when market
imperfections are taken into account. The main message of this paper is that
aggregate fluctuations can be better understood by analysing the evolution of the
cross-sectional distribution at micro level. In their model a shock will trickle down
across the whole distribution of agents modifying aggregate behaviour and, since
composition effects are large, it may produce very different dynamics. Moreover,
since there exist as many steady states as the agents' equilibrium distribution, the
concept of a "natural rate" is lost.
In The Dynamic Interaction of Rational Fundamentalists and Trend Chasing
Chartists in a Monetary Economy, Chiarella and Khomin develop a model of a
monetary economy which exhibits heterogeneity of behaviour over time but where
at any point in time agents hold either "fundamentalist" or "chartist" views and the
fundamentalist view is adopted by more agents as inflation accelerates or
decelerates. Thus, the self-reinforcing switching behaviour will lead to complex
dynamic behaviour but by no means necessarily to a traditional steady state.