The Opposite Effect of Rational Expectations and Differentiated Information Costs for Heterogeneous Fundamentalists on the Stability of an Evolutive Muthian Cobweb Model
University of Milan Bicocca Department of Economics, Management and Statistics Working Paper No. 460
31 Pages Posted: 20 Jan 2021 Last revised: 10 Dec 2021
Date Written: January 19, 2021
Abstract
We extend the profit-based evolutionary cobweb setting in Hommes and Wagener (2010) by assuming that the market is populated by rational producers, which correctly anticipate the next period price, in addition to biased and unbiased fundamentalists. Moreover, we suppose that agents face heterogeneous information costs, proportional to their rationality degree. Since adding rational agents enlarges the stability region of the steady-state, while introducing diversified information costs for fundamentalists shrinks it, we analyze whether one of the two aspects always prevails over the other one when they are jointly taken into account. In addition, we also investigate if the complex dynamic outcomes emerging when enriching the original framework in Hommes and Wagener (2010) with rational agents persist or are inhibited by the introduction of information costs for all agent types.
Keywords: Evolutionary cobweb model; heterogeneous information costs; local stability; complex dynamics.
Suggested Citation: Suggested Citation