Two destabilizing strategies may be jointly stabilizing |
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Authors: | Reiner Franke Tim Nesemann |
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Institution: | (1) Present address: Department of Economics, University of Bremen, D-28334 Bremen, Germany;(2) Present address: Department of Mathematics and Computer Science, University of Bremen, D-28334 Bremen, Germany |
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Abstract: | The paper contributes to the literature on learning dynamics with heterogeneous agents, demonstrating that heterogeneity as such may be conducive to stability. The point is made in the framework of the cobweb model, where two different forecast procedures are considered. Either one destabilizes the price dynamics when it is uniformly adopted by all firms, or the price equilibrium becomes locally stable if firms are heterogenous and the two rules are suitably mixed within the population. It is also indicated that such a stabilizing composition is endogenously brought about by an adjustment process in which the population shares evolve under evolutionary pressure. |
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Keywords: | behavioral heterogeneity bounded rationality learning cobweb model |
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