Behavioural Heterogeneity under Evolutionary Pressure: Macroeconomic Implications of Costly Optimisation

Rajiv Sethi () and Reiner Franke

Economic Journal, 1995, vol. 105, issue 430, 583-600

Abstract: A model is developed in which a continuum of agents makes interdependent output decisions in a stochastic environment characterized by strategic complementarity. Two groups are distinguished: naive agents follow a costless adaptive expectations rule, while sophisticated agents incur an optimization cost to achieve self-fulfilling expectations. The paper studies the dynamics generated as the population composition evolves under pressure of differential payoffs. Sophisticated agents are favored if optimization is cheap or the stochastic environment highly variable but naive agents generally persist. A higher long-run share of sophisticated agents is associated with greater output variability and low output persistence. Copyright 1995 by Royal Economic Society.

Date: 1995
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