Heterogeneous Interacting Economic Agents and Stochastic Games

METEOR Working Paper No. RM/01/031

16 Pages Posted: 10 Sep 2002  

P. Jean-Jacques Herings

Maastricht University

Ronald Peeters

Maastricht University

Date Written: December 7, 2001


Stochastic games offer a rich mathematical structure that makes it possible to analyze situations with heterogeneous and interacting economic agents. Depending on the actions of the economic agents, the economic environment changes from one period to another. We focus on stationary equilibrium, the simplest form of behavior that is consistent with rationality. Since the number of stationary equilibria abound, we present the stochastic tracing procedure, a method to select equilibria. Since stationary equilibria are difficult to characterize analytically, we also present a numerical algorithm by which they can be computed. The algorithm is constructed in such a way that the equilibrium selected by the stochastic tracing procedure is computed. We illustrate the usefulness of this approach by showing how it leads to new insights in the theory of dynamic oligopoly.

Keywords: Stochastic games, stationary equilibrium, tracing procedure, numerical algorithms

JEL Classification: C62, C63, C72, C73

Suggested Citation

Herings, P. Jean-Jacques and Peeters, Ronald, Heterogeneous Interacting Economic Agents and Stochastic Games (December 7, 2001). METEOR Working Paper No. RM/01/031. Available at SSRN: https://ssrn.com/abstract=319225 or http://dx.doi.org/10.2139/ssrn.319225

P. Jean-Jacques Herings (Contact Author)

Maastricht University ( email )

Department of Economics
P.O. Box 616
6200 MD Maastricht
+31 43 3883636 (Phone)
+31 43 3884878 (Fax)

HOME PAGE: http://www.personeel.unimaas.nl/p.herings/herings.htm

Ronald Peeters

Maastricht University ( email )

Department of Economics
PO Box 616
Maastricht, 6200 MD

HOME PAGE: http://www.personeel.unimaas.nl/r.peeters/

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