This paper provides an analysis of the asymptotic properties of consumption allocations in a stoc... more This paper provides an analysis of the asymptotic properties of consumption allocations in a stochastic general equilibrium model with heterogeneous consumers. In particular we investigate the market selection hypothesis, that markets favor traders with more accurate beliefs. We show that in any Pareto optimal allocation whether each consumer vanishes or survives is determined entirely by discount factors and beliefs. Since equilibrium allocations in economies with complete markets are Pareto optimal, our results characterize the limit behavior of these economies. We show that, all else equal, the market selects for consumers who use Bayesian learning with the truth in the support of their prior and selects among Bayesians according to the size of the their parameter space. Finally, we show that in economies with incomplete markets these conclusions may not hold. Payoff functions can matter for long run survival, and the market selection hypothesis fails
I shall not today attempt further to define the kinds of material I understand to be embraced wit... more I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description; and perhaps I could never succeed in intelligibly doing so. But I know it when I see it,. .. Justice Potter Stewart, 378 U.S. 184, 197. Rationality is for economists as pornography was to the U.S. Supreme Court, undefinable but nonetheless easily identified; and yet, like the Justices of the Court, no two economists share a common definition. This entry details some of the common meanings of individual (as opposed to social) rationality and discusses their uses. Our point of view is that of working economists rather than that of psychologists. Economics is committed to METHODOLOGICAL INDIVIDUALISM, the claim that social phenomena must be explained in terms of individual actions which in turn must be explained through individuals' motivations. This commitment requires a theory of human action. The rationality principle, that individuals act in their best interest as they perceive it, provides such a theory. In this entry we evaluate the rationality hypothesis and its alternatives from the perspective of how they explain social phenomena such as the behavior of a market. Our interest is in social life rather than in the psychology of an individual.
While interest in social determinants of individual behavior has led to a rich theoretical litera... more While interest in social determinants of individual behavior has led to a rich theoretical literature and many efforts to measure these influences, a mature "social econometrics" has yet to emerge. This chapter provides a critical overview of the identification of social interactions. We consider linear and discrete choice models as well as social networks structures. We also consider experimental and quasi-experimental methods. In addition to describing the state of the identification literature, we indicate areas where additional research is especially needed and suggest some directions that appear to be especially promising.
For this approach in some detail, see Chapter 2 of Arrow and Hahn. Consider first an exchange eco... more For this approach in some detail, see Chapter 2 of Arrow and Hahn. Consider first an exchange economy. Each of I individuals has an endowment of L commodities, ωi for individual i. Were individuals utility maximizers, we would derive a demand function or correspondence, di(p), for the L commodities, which depends upon the vector p of market prices. Excess demand for individual n is zi(p) = di(p) − ei, the excess of trader i’s demand over his supply. Aggregate excess demand is then Z(p) = ∑i zi(p). Equilibrium can be defined in terms of excess demand: Definition 1. A competitive equilibrium is a price vector p ≫ 0 such that Z(p) = 0.
We propose a new welfare criterion that allows us to rank alternative financial market structures... more We propose a new welfare criterion that allows us to rank alternative financial market structures in the presence of belief heterogeneity. We analyze economies with complete and incomplete financial markets and/or restricted trading possibilities in the form of borrowing limits or transaction costs. We describe circumstances under which various restrictions on financial markets are desirable according to our welfare criterion.
The word ‘duality ’ is often used to invoke a contrast between two related concepts, as when the ... more The word ‘duality ’ is often used to invoke a contrast between two related concepts, as when the informal, peasant, or agricultural sector of an economy is labeled as dual to the formal, or profitmaximizing sector. In microeconomic analysis, however, ‘duality ’ refers to connections between quantities and prices which arise as a consequence of the hypotheses of optimization and convexity.
Firms maximize profits and consumers maximize preferences. This is the core of microeconomics, an... more Firms maximize profits and consumers maximize preferences. This is the core of microeconomics, and under conventional assumptions about decreasing returns it is an application of convex programming. The paradigm of convex optimization, however, runs even deeper through economic analysis. The idea that competitive markets perform well, which dates back at least to Adam Smith, has been interpreted since the neoclassical revolution as a variety of conjugate duality for the primal optimization problem of finding Pareto-optimal allocations. The purpose of this entry and the companion entry on DUALITY is (in part) to explain this sentence. This entry surveys without proof the basic mathematics of convex sets and convex optimization with an eye towards their application to microeconomic and general equilibrium theory, some of which can be found under DUALITY.
In strategic-form games Selten's (1975) perfect equilibria are admissible. This is not true f... more In strategic-form games Selten's (1975) perfect equilibria are admissible. This is not true for extensive-form perfection. Quasi-perfect equilibria solves this problem using Selten's (1975) trembles to introduce a refinement of Nash equilibrium wherein each player puts infinitesimal weight on other players's strategies, but not her own. One might be sure of oneself, while (infinitesimally) unsure of others. However, also quasi-perfection itself is not without problems, precisely because it ignores future infinitesimal uncertainties in one's own play. We introduce a refinement; perfect quasi-perfect equilibrium, to capture the best of both concepts. Our idea is to force each player to consider infinitesimal deviations in her own future play, but to make them so unlikely that they are infinitely less likely than the combined likelihood of deviations by all other players. Our refinement uses only strategies that are neither weakly dominated in the strategic form nor in ...
1. Introduction Many of the central questions related to evolution of social and cultural norms a... more 1. Introduction Many of the central questions related to evolution of social and cultural norms and dynamics of sociopolitical change involve interactions among individuals and groups with different identities. The understanding of these interactions is crucial for creating a new interdisciplinary science that on the one hand utilizes domain-specific expertise from Economics, Political Economy, Political science and Sociology, and on the other hand leverages the advances in the science of networks, systems theory, and computation and our understanding of la
This paper describes the relationship between two different binary choice social interaction mode... more This paper describes the relationship between two different binary choice social interaction models. The Brock and Durlauf (2001) model is essentially a static Nash equilibrium model with random utility preferences. In the Blume (forthcoming) model is a population game model similar to Blume (1993), Kandori, Mailath, and Rob (1993) and Young (1993). We show that the equilibria of the Brock-Durlauf model are steady states of a differential equation which is a deterministic approximation of the sample-path behavior of Blume's model. Moreover, the limit distribution of this model clusters around a subset of the steady states when the population is large.
Link formation: Players can form up to A bilateral relationships with others, obtaining a benefit... more Link formation: Players can form up to A bilateral relationships with others, obtaining a benefit of a> 0 from each. These relationships form an undirected graph G=(V, E). A failure process then spreads through the graph: Each node fails spontaneously with probability q ...
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, a... more JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact
In September 1987 twenty people came together at the Santa Fe Institute to talk about "the econom... more In September 1987 twenty people came together at the Santa Fe Institute to talk about "the economy as an evolving, complex system." Ten were theoretical economists, invited by Kenneth J. Arrow, and ten were physicists, biologists and computer scientists, invited by Philip W. Anderson. The meeting was motivated by the hope that new ideas bubbling in the natural sciences, loosely tied together under the rubric of "the sciences of complexity," might stimulate new ways of thinking about economic problems. For ten days, economists and natural scientists took turns talking about their respective worlds and methodologies. While physicists grappled with general equilibrium analysis and noncooperative game theory, economists tried to make sense of spin glass models, Boolean networks, and genetic algorithms. The meeting left two legacies. The first was a volume of essays, The Economy as an Evolving Complex System, edited by Arrow, Anderson and David Pines. The other was the founding, in 1988, of the Economics Program at the Santa Fe Institute, the Institute's first resident research program. The Program's mission was to encourage the understanding of economic phenomena from a complexity perspective, which involved the development of theory as well as tools for modeling and for empirical analysis. To this end, since 1988, the Program has brought researchers to Santa Fe, sponsored research projects, held several workshops each year, and published several dozen working papers. And since 1994, it has held an annual summer school for economics graduate students. This volume, The Economy as an Evolving Complex System II, represents the proceedings of an August, 1996 workshop sponsored by the SFI Economics Program. The intention of this workshop was to take stock, to ask: What has a complexity perspective contributed to economics in the past decade? In contrast to the 1987 workshop, almost all of the presentations addressed economic problems, and most presenters were economists by training. In addition, while some of the work presented was conceived or carried out at the Institute, some of the participants had no previous relation with SFI-research related to the complexity perspective is under active development now in a number of different institutes and university departments. But just what is the complexity perspective in economics? That is not an easy question to
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