Replicator dynamics in a Cobweb model with rationally heterogeneous expectations

Branch, William A.; McGough, Bruce

doi:10.1016/j.jebo.2005.09.003

Cited by 56 publications

(52 citation statements)

References 13 publications

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“…Rational routes to randomness are a surprisingly robust bifurcation path: Goeree and Hommes (2000) generalize the Brock and Hommes (1997) model to the case of nonlinear demand and supply; in Lasselle et al (2005) firms switch between rational and adaptive expectations; and Branch and McGough (2008) update the market shares of firms using naïve and rational expectations on the basis of replicator dynamics. Rational routes to randomness can also be observed in other model contexts.…”

Section: Introductionmentioning

confidence: 99%

Managing rational routes to randomness

Schmitt

Westerhoff

2015

Journal of Economic Behavior & Organization

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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. KeywordsCobweb models; discrete choice approach; intensity of choice; profit taxes; stability analysis; policy implications. JEL ClassificationD84; E30; Q11.

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Section: Introductionmentioning

confidence: 99%

Managing rational routes to randomness

Schmitt

Westerhoff

2015

Journal of Economic Behavior & Organization

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“…A change in the profit tax rate may cause a jump in tax revenues, and a simple return towards the original tax rate may not suffice to re-establish the previous level of tax revenues. 5 4 A similar picture emerges if we plot the mean tax revenue generated from the market and the firms' outside option as a function of the tax rate. 5 We observe the same qualitative results if we set the tax rate for the firms' outside profits to lower or higher values.…”

Section: Further Economic Effects Of Nonlinear Profit Taxesmentioning

confidence: 66%

“…4 Finally, the bottom right panel of Figure 4 depicts the development of the mean tax revenue generated from the market when the tax rate for outside profits is fixed at 0.5, while the tax rate for market profits is increased from 0 to 1. For this version of our model, a typical Laffer curve emerges.…”

Section: Further Economic Effects Of Nonlinear Profit Taxesmentioning

confidence: 99%

“…We take a behavioral approach in the sense that past realized profits are the main determinant of firms' decisions, similar to the evolutionary models of Brock and Hommes (1997), Goeree and Hommes (2000), Laselle et al (2005), Branch and McGough (2008), Dieci and Westerhoff (2010) and Tuinstra et al (2014). Let us illustrate the implications of a tax-induced kink in this environment from an economic perspective.…”

Section: Introductionmentioning

confidence: 99%

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Side effects of nonlinear profit taxes in an evolutionary market entry model: Abrupt changes, coexisting attractors and hysteresis problems

Schmitt

Tuinstra

Westerhoff

2017

Journal of Economic Behavior & Organization

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Suggested Citation: Schmitt, Noemi; Tuinstra, Jan; Westerhoff, Frank (2015) : Side effects of nonlinear profit taxes in an evolutionary market entry model: abrupt changes, coexisting attractors and hysteresis problems, BERG Working Paper Series, No. 103, BERG AbstractIn order to demonstrate that nonlinear tax systems may have surprising and potentially undesirable side effects, we develop an evolutionary market entry model in which firms decide on the basis of past profit opportunities whether or not to enter a competitive market. Our main focus is on the case of a proportional tax on positive profits. Such a piecewise-linear tax scheme induces a kink in the profit functions of firms' strategies, and may lead to abrupt changes in a market's dynamics, coexisting attractors and hysteresis problems. Since these phenomena can also be observed in more general models, a proper understanding of their basic mechanism may be helpful to explain the intricate behavior of many economic systems.

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“…For the models developed in Brock and LeBaron (1996), Brock and Hommes (1998), De Grauwe and Grimaldi (2005), and Giardina and Bouchaud (2003), among others, the popularity of a particular information source depend directly on relative performance. Alternatively, relative performance determines the innovation in popularity in Sethi and Franke (1995), Branch and McGough (2008), and Goldbaum (2005). 1 Another source of market evo-1 Wealth accumulation to those using the particular information or strategy is another mechanism generating evolution in market impact, as in Chiarella and He (2001), Farmer and Joshi (2002), Chiarella, Dieci and Gardini lution comes from traders updating how they use information in developing a trading strategy using statistical learning tools, such as Marcet and Sargent (1989a), Marcet and Sargent (1989b), and Evans and Honkapohja (2001).…”

Section: Introductionmentioning

confidence: 99%

Divergent Behavior in Markets with Idiosyncratic Private Information

Goldbaum

2016

SSRN Journal

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A state of perpetually evolving divergent trading strategies is the natural consequence of a market with idiosyncratic private information. In the face of intrinsic uncertainty about other traders' strategies, participants resort to learning and adaptation to identify and exploit profitable trading opportunities. Model-consistent use of market-based information generally improves price performance but can inadvertently produce episodes of sudden mis-pricing. The paper examines the impact of trader's use of information and bounded rationality on price efficiency.

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Replicator dynamics in a Cobweb model with rationally heterogeneous expectations

Cited by 56 publications

References 13 publications

Managing rational routes to randomness

Managing rational routes to randomness

Side effects of nonlinear profit taxes in an evolutionary market entry model: Abrupt changes, coexisting attractors and hysteresis problems

Divergent Behavior in Markets with Idiosyncratic Private Information

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