the effectiveness of keynes tobin transaction taxes when heterogeneous agents can trade in different markets a behavioral finance approach abstract we develop a model in which boundedly rational agents apply technical and fundamental analysis to identify trading signals in two different speculative markets whether an agent trades and if so in which market with which strategy depends on profit considerations as it turns out an ongoing evolutionary competition between the trading strategies causes complex price dynamics which closely resembles the behavior of actual speculative prices moreover we find that if the agents have to pay a transaction tax in one market price variability decreases in this market but increases in the other market however the imposition of a uniform tax on all transactions stabilizes both markets our results suggest that if regulators of a market introduce a transaction tax other markets are likely to follow

nonlinearities in economic dynamics two reasons that led to the dominance of the linear stochastic difference equations approach the first one was the fact that the nonlinear systems seemed incapable of reproducing the statistical aspects of actual economic time series at best such models were able to produce periodic motion1 and an examination of the spectra of economic time series showed the absence of the spikes that characterise periodic data the emphasis on the equilibrium approach to aggregate economic behaviour cf lucas i 986 would make things even more difficult the plethora of stability results for models of infinitely lived agents with perfect foresight turnpike theorems suggested that even the regular fluctuations that had been derived in the literature on endogenous business cycles were incompatible with a theory that had solid microeconomic foundations further this indicated that while nonlinearities could be present the explanations of the fluctuations had to rest solely on the presence of exogenous shocks that working through the equilibrating mechanism would create the observed randomness if such shocks were absent the system would tend to a stationary state the second reason was the empirical success of the models based on linear stochastic difference equations low order autoregressive processes captured some of the features of aggregate time series in turn these processes can in principle result from an economy with complete markets where production is subject to exogenous shocks though the task of confronting these equilibrium models with actual data has not yielded uncontroversial results see the discussion and references in section i there was no obvious gain in the

on the indeterminacy of capital accumulation paths abstract in neoclassical optimal growth models the stability of the accumulation paths depends on the discount parameter we prove that for discount factors small enough the policy function which describes an optimal path can be of any type the result is achieved using the notion of concavity we adopt a constructive approach given any twice differentiable map we show how to construct an optimal growth problem which produces that map as the optimal policy function a consequence is that chaos can appear in these models we also provide bounds on the values of the discount parameter for which indeterminacy is possible

further evidence on the asymmetric behavior of economic time series over the business cycle evidence has recently been presented by salih neftci to support the hypothesis that recessions in economic activity tend to be steeper and more short lived than recoveries in economic activity that evidence however was confined to the behavior of the unemployment rate in the united states in this paper it is shown that when neftci s methods are applied to analyze the behavior of real gross national product investment and productivity in the united states or when they are used to analyze industrial production abroad the asymmetry hypothesis seems to be less compelling

a characterization of erratic dynamics in the overlapping generations model abstract in this paper we characterize and give examples o wide classes of utility functions which generate erratic dynamics in the standard deterministic overlapping generations model erratic dynamics refers to feasible trajectories which are bounded but which do not converge to stationary points or periodic orbits we show that such trajectories are pareto efficient we introduce credit into the model and show how a constant credit expansion rate can result in erratic trajectories in prices and the real value of credit finally we briefly discuss certain technical aspects of the mathematics used and the statistical nature of the dynamics that can arise from deterministic dynamical systems

oligopoly game price makers meet price takers abstract the paper studies an oligopoly game where firms can choose between price taking and price making strategies on a mixed market price takers are always better off than price makers though the profits of both types decline in the number of price takers we investigate and confront two possibilities of firms decisions about their types forward looking equilibrium reasoning and backward looking individual learning we find that the cournot outcome is the only equilibrium prediction and it is learnable if firms are sufficiently sensitive to profit differences however with a larger number of firms a unilateral deviation from cournot behavior becomes profitable under learning this incentive creates a space for permanent oscillations over different markets with a positive but low number of price takers

dynamic predictor selection in a new keynesian model with heterogeneous expectations abstract this paper introduces dynamic predictor selection into a new keynesian model with heterogeneous expectations and examines its implications for monetary policy we extend branch and mcgough 2009 by incorporating endogenous time varying predictor proportions along the lines of brock and hommes 1997 we find that periodic orbits and complex dynamics may arise even if the model under rational expectations has a unique stationary solution the qualitative nature of the non linear dynamics turns on the interaction between hawkishness of the government s policy and the extrapolative behavior of non rational agents

the role of market forces in assuring contractual performance the conditions under which transactors can use the market repeat purchase mechanism of contract enforcement are examined increased price is shown to be a means of assuring contractual performance a necessary and sufficient condition for performance is the existence of price sufficiently above salvageable production costs so that the nonperforming firm loses a discounted steam of rents on future sales which is greater than the wealth increase from nonperformance this will generally imply a market price greater than the perfectly competitive price and rationalize investments in firm specific assets advertising investments thereby become a positive indicator of likely performance

sunk costs financial markets and contestability abstract this paper analyzes the proposition that the theory or contestable markets will yield good predictions for markets in which sunk costs although present are unimportant two results are of interest 1 if costs are at all sunk incumbent firms will be able to engage in strategic behavior with respect to entrants 2 if no costs are sunk but firms finance investment by borrowing incumbent firms will be able to engage in strategic behavior with respect to entrants in these cases one must analyze strategic behavior of incumbent firms to analyze market performance

a simultaneous equation analysis of advertising concentration and profitability nearly two decades of econometric research have been completed in testing relationships between industrial market structure and performance recently a number of authors have reexamined these studies and cautioned on a number of conceptual difficulties which subject the results and interpretation of previous empirical work to question one primary criticism of previous research has been the failure to account for the simultaneous nature of the interrelation among elements of industry structure conduct and performance 2 4 5 11 22 25 30 while the determinants of variables such as profits advertising and concentration have been examined separately within the context of single equation models the underlying theory suggests that these variables are more properly considered as jointly determined within a system of simultaneous equations estimation of single equation models when a simultaneous system is appropriate leads to parameter estimates that are both biased and inconsistent previous empirical studies of the structure performance relationship have also suffered due to the omission of certain critical variables first the role of international trade as an element of market structure has yet to be generally incorporated into empirical studies in spite of recent theoretical work that has demonstrated its potential importance 3 20 21 second interindustry differentials in the price elasticity of demand have been neglected even though theoretical analysis clearly underscores the necessity of explicity accounting for

tracing the dynamics of competition evidence from company profits this article proposes a simple approach to analyzing profit dynamics which allows for time varying persistence of profits the time series model is a simple autoregressive process where the dynamics of the persistence parameter follow an autoregressive process using the longest time series available on profits for more than a hundred u s firms we find that there is ample evidence of time variation in the persistence parameter jel l00 c22

side effects of nonlinear profit taxes in an evolutionary market entry model abrupt changes coexisting attractors and hysteresis problems in 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 firms profit functions 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

stationary sunspot equilibria in a finance constrained economy abstract stationary sunspot equilibria are shown to exist in a production economy with infinite lived agents when it is not possible to borrow against future wage income equilibrium fluctuations exhibit persistence over time scales of the same order of magnitude as observed business cycles an active fiscal policy that stabilizes aggregate money expenditures can prevent such fluctuations

positive welfare effects of trade barriers in a dynamic partial equilibrium model we develop a simple two region cobweb type dynamic partial equilibrium model to demonstrate the existence of optimal possibly non zero trade barriers a pure comparative statics analysis of our model suggests that a reduction of trade barriers modeled as small but positive import tariffs always enhances welfare however taking a dynamic perspective reveals that nonlinear trade interactions between two regions may generate endogenous price fluctuations which can hamper welfare finally we allow special interest groups such as consumers or producers from these two regions to lobby for a particular level of trade barriers our model predicts that time varying trade barriers may be another channel for market instability

firm and industry effects in industrial economics the traditional view in industrial economics suggests that high concentration leads to tacit collusion poor performance and elevated profit followers of the traditional view relied upon the empirical relationship between profit rates and market concentration to justify the highly activist antitrust policy of the 1945 1980 period the activist antitrust era reached its zenith with the nearly per se prohibition of horizontal mergers as outlined in the 1968 merger guidelines issued by the justice department s antitrust division the 1980s have witnessed the emergence of the revisionist school as the dominant view in the field of industrial economics the revisionists contend

nonlinearity and chaos in economic models implications for policy decisions this survey paper discusses the policy implications that can be expected from the recent research on nonlinearity and chaos in economic models expected policy implications are interpreted as a driving force behind the recent proliferation of research in this area in general it appears that no new justification for policy intervention is developed in models of endogenous fluctuations although this conclusion depends in part on the definition of equilibrium when justified however policy tends to be very effective in these models copyright 1993 by royal economic society

value maximizing price and advertising with stochastic demand two inescapable characteristics of the monopoly firm s decision problem are imperfect information and the interdependence of its price advertising and output choices in the large modern corporation imperfect information concerning the final product demand that will materialize within the firm s planning period is perhaps the most common source of uncertainty or risk previous work in the theory of the firm under risk has demonstrated two avenues by which stochastic demand may influence the firm s pricing and advertising decisions edwin mills 21 22 argued that if both price and output must be chosen before random demand is known then firms will attempt to avoid incurring surplus production costs or foregoing potential sales by setting ex ante prices and outputs that depend upon capacity costs the costs of carrying inventory the price cost differential for the marginal sale and all the moments of the probability distribution of demand 22 88 mills demonstrated that with constant marginal cost and a demand distribution independent of the price level even the expected profit maximizing epm firm would respond to risk by lowering ex ante price as demand variance increased nevertheless without capacity constraints or production lags i e with output set ex post mills concluded uncertainty plays no essential role in the epm decision process 22 85 later research into alternative objectives that might motivate managerial decisions has shown that even a firm that can with ex post output clear its market at a previously quoted price will alter its pricing behavior as the variance of stochastic demand increases indeed precisely mills s result that ex ante price falls with increased risk has emerged from ex post output models in which risk averse managers maximize the expected utility of stochastic profits 15 16 378 400 18 20 similar results have been derived for advertising as well as price in a two variable model of such managerial utility maximizing mum choices 16 9 7 26 yet all these mum models have focused too little attention on the representative in

chaotic dynamics in economic time series abstract there has recently been considerable interest in chaotic dynamics in a variety of disciplines this paper introduces and then surveys some of the associated literature and techniques applications to economic theory are discussed but the primary focus is on empirical applicability in addition to surveying the literature we also provide an example of the use of these techniques in economics we conclude by highlighting the importance of the techniques for empirical work as well as considering their context in econometric methodology

can agents learn their way out of chaos abstract in an olg model with adaptive learning forecast errors of the agents are analyzed in regions where the resulting dynamical system behaves chaoticly agents think they are living in stochastic world it is shown that they cannot reject the hypothesis that mean and autocorrelation coefficients of their forecast errors are 0 thus they have no incentive to switch to another learning rule predictions cannot be unmasked as being wrong because of the limited statistical tools the agents possess bounded rationality these phenomena occur in the olg model even with a cobb douglas utility function

exchange rate expectations of chartists and fundamentalists this paper provides novel evidence on exchange rate expectations of both chartists and fundamentalists separately these groups indeed form expectations differently chartists change their expectations more often however all professionals expectations vary considerably as they generally follow strong exchange rate trends in line with non linear exchange rate modeling professionals expect mean reversion only if exchange rates deviate much from ppp chartists survive in fx markets as they forecast equally accurately as fundamentalists unexpected from an effcient market viewpoint chartists even outperform fundamentalists at short horizons overall these findings clearly support the chartist fundamentalist approach

ordinary least squares learning and nonlinearities in macroeconomics the paper reviews the literature on adaptive learning in macroeconomic settings where the formation of expectations is particularly relevant special attention will be given to simple two period overlapping generations models with a unique fixed point perfect foresight equilibrium in this kind of scenario eventual long term periodic and a periodic cycles are exclusively the result of the process of learning the outcome that high rates of money growth have a potentially destabilizing effect generating periodic fluctuations and chaos is emphasized the persistence of systematic forecast errors in a scenario where agents are supposed to act rationally is relevant in this context and it will be thoroughly discussed resorting to the notions of self fulfilling mistakes consistent expectations equilibria and beliefs equilibria

equilibrium models displaying endogenous fluctuations and chaos abstract this paper surveys current developments in dynamic general equilibrium theory concerned with conditions under which endogenous fluctuations are possible existing contributions are divided into two classes the larger one consists of models with a unique perfect foresight equilibrium while the second includes models where equilibrium is indeterminate and the set of equilibria involving endogenous fluctuations includes sunspots equilibria while the two classes of models involve oscillations of different natures and with different policy implications we show that both are consistent with optimizing behavior and competitive equilibrium

replicator dynamics in a cobweb model with rationally heterogeneous expectations abstract this paper extends the adaptively rational equilibrium dynamics of brock and hommes brock w a hommes c h 1997 a rational route to randomness econometrica 65 1059 1160 by introducing a generalized version of the replicator dynamic the replicator equilibrium dynamics red couples the price dynamics of a cobweb model with predictor selection governed by an evolutionary replicator dynamic we show that the red supports the conclusion of sethi and franke sethi r franke r 1995 behavioural heterogeneity under evolutionary pressure macroeconomic implications of costly optimisation the economic journal 105 583 600 that costly rational beliefs persist though unlike them these results obtain in the deterministic case numerical evidence shows that complex dynamics exist as in brock and hommes even though no weight is placed on strictly dominated predictors in an red steady state

nonlinear dynamics and stock returns simple deterministic systems are capable of generating chaotic output that mimics the output of stochastic systems for this reason algorithms have been developed to distinguish between these two alternatives these algorithms and related statistical tests are also useful in detecting the presence of nonlinear dependence in time series in this article the authors apply these procedures to stock returns and find evidence that indicates the presence of nonlinear dependence on weekly returns from the center for research in security prices value weighted index copyright 1989 by the university of chicago

stabilizing competitive business cycles abstract we study how stylized monetary proportional money transfers fiscal lump sum money transfers and public expenditure policies may eliminate endogenous deterministic cycles and stationary markov sunspot equilibria in a simple version of the overlapping generations model we also present new constructive methods for analyzing stationary markov sunspot equilibria in such a framework

is the business cycle characterized by deterministic chaos abstract tests are conducted on u s macroeconomic data for the presence of low dimensional deterministic chaos where deterministic chaos is defined as in grandmont s 1985 walras bowley lecture or in brock 1986 the idea is to test for evidence of endogenous instability causing the business cycle low order autoregressions are hard to reject with our methods evidence of chaos is weak but our tests may be too weak to detect it evidence of nonlinearity is present in employment 1950 i to 1983 iv unemployment 1949 i to 1982 iv monthly post war industrial production and pig iron production 1877 1937

structural stochastic volatility in asset pricing dynamics estimation and model contest abstract in the framework of small scale agent based financial market models the paper starts out from the concept of structural stochastic volatility which derives from different noise levels in the demand of fundamentalists and chartists and the time varying market shares of the two groups it advances several different specifications of the endogenous switching between the trading strategies and then estimates these models by the method of simulated moments msms where the choice of the moments reflects the basic stylized facts of the daily returns of a stock market index in addition to the standard version of msm with a quadratic loss function we also take into account how often a great number of monte carlo simulation runs happen to yield moments that are all contained within their empirical confidence intervals the model contest along these lines reveals a strong role for a tamed herding component the quantitative performance of the winner model is so good that it may provide a standard for future research

chaos significance mechanism and economic applications imagine a bargaining model say involving diplomats negotiating tariff levels or a disarmament treaty in which each party has been instructed by higher headquarters to respond to each new offer by her opposite number with a counteroffer that is to be calculated from a simple reaction function provided in advance both negotiating parties are prohibited from revealing their own reaction functions to the other if the perfectly deterministic sequence of offers and counteroffers that must emerge from these simple rules were to begin to oscillate wildly and apparently at random the negotiations could easily break down as each party not understanding the source of the problem came to suspect the other side of duplicity and sabotage yet all that may be involved as we will see is the phenomenon referred to as chaos a case that is emphatically not pathological but in which a dynamic mechanism that is very simple and deterministic yields a time path so complicated that it will pass most standard tests of randomness chaos has become a subject of great interest to specialists and nonspecialists alike besides economics it has entered the literature of geometry physics ecology and meteorology it has been written about at length in the new york times magazine and scientific american as well as technical publications this article seeks to describe what it is how it works and what it means for economics

the profitability concentration relation market power or efficiency industrial economists have been studying the relationship between profitability and concentration using cross industry samples for many years now however as sometimes happens once it appeared that some consensus had been achieved with few exceptions market concentration and industry profitability are positively correlated peltzman i977 p 229 people began to question the interpretation of those results in particular demsetz e g i973 i974 and others suggested that rather than concentration market power leading to higher prices and profits the causal direction in fact ran from greater efficiency to both higher profits and incidentally to higher concentration our purpose here is to subject these conflicting hypotheses to cross industry empirical test using u k data in order to do this we first develop a model which is sufficiently general to allow for both alternative explanations of a positive concentration profitability correlation in the light of this model we then examine the implications for the within industry relation between market share and firm level profitability more specifically we explore demsetz s claim that the empirical form of this relationship should signal which of the alternative hypotheses is consistent with the between industry profitability concentration correlation our model suggests that in certain special circumstances this claim is partly justified in that it should be possible to assess the relative strengths of the market power and efficiency effects from the within industry relation more generally however factors such as product differentiation and scale economies may seriously impair the information content of the relation with at least a strong suspicion that the estimates will tend to exaggerate the evidence in favour of the efficiency hypothesis in the event our results tend to confirm that for most industries the within industry data offer little conclusive support for either hypothesis but for a not insignificant minority of industries the evidence suggests some support for the view that both efficiency and market power are at work simultaneously our model is detailed in section ii and estimated on u k data in section iii after which we offer a few comments in section iv first however we drovide a backcloth to the later analysis

on the complexities of complex economic dynamics complex economic nonlinear dynamics endogenously do not converge to a point a limit cycle or an explosion their study developed out of earlier studies of cybernetic catastrophic and chaotic systems complexity analysis stresses interactions among dispersed agents without a global controller tangled hierarchies adaptive learning evolution and novelty and out of equilibrium dynamics complexity methods include interacting particle systems self organized criticality and evolutionary game theory to simulate artificial stock markets and other phenomena theoretically bounded rationality replaces rational expectations complexity theory influences empirical methods and restructures policy debates

the unemployment rate and the business cycle in britain an aggregate and regional analysis jones d manning n and stevenson m 1994 the unemployment rate and the business cycle in britain an aggregate and regional analysis reg studies 28 591 604 it has been suggested that if the business cycle is to be explained then its behaviour should be related to a non linear dynamic process not unlike a limit cycle the time irreversibility exhibited by post war unemployment data is not untypical of a pattern generated by such a non linear structure such a possibility could have important implications for economic policy in certain cases non linearities make forecasting extremely hazardous if not impossible as base line measurement errors cause prediction errors to accumulate at an exponential rate equally worrying is that fundamentally mistaken policy can arise when linear specifications are used to approximate non linear relationships the present paper tests for non linearities in the dynamics of regional unemployment in britain appealing to the idea of a regime switching process we u

a robust rational route to randomness in a simple asset pricing model abstract we investigate asset pricing dynamics in an adaptive evolutionary asset pricing model with fundamentalists trend followers and a market maker agents can choose between a fundamentalist strategy at positive information cost or choose a trend following strategy for free price adjustment is proportional to the excess demand in the asset market agents asynchronously update their strategy according to realized net profits in the recent past as agents become more sensitive to differences in strategy performance the fundamental steady state becomes unstable and multiple steady states may arise as the traders sensitivity to differences in fitness increases a bifurcation route to chaos sets in due to homoclinic bifurcations of stable and unstable manifolds of the fundamental steady state

living in an imaginary world that looks real abstract in the paper we show using standard approaches general equilibrium modeling and the assumption of complete rationality that the macroeconomic environment is endogenous and is indeterminate specifically it is argued without resorting to sunspot type arguments that microeconomic fundamentals do not suffice to characterize the economy at the macro level in particular we show how perceptions of rational agents of the workings of the economy a shape the environment b affect the environment sufficiently to ensure that rational economic agents find the observed environment consistent with their beliefs even though it is not as a by product we illustrate that endogenous macro uncertainty can arise as an outcome if rational economic agents whose expectations are anchored on endogenous variables expect them to arise finally we show that systematic errors can persist indefinitely under rationality

on learning to forecast in an endogenous growth model with externalities abstract this paper investigates whether learning leads to perfect foresight in a growth model that might present local indeterminacy of perfect foresight equilibria the paper asserts that under some parametric conditions on technology and preferences equilibria under the assumption of learning converge to a limit point that is different from the one corresponding to perfect foresight equilibria the paper also concludes that endogenous cycles may emerge in the economy with learning and in the economy with perfect foresight however the combination of parameters for which these fluctuations appear may differ in each economy

on endogenous competitive business cycles the belief that the long run equilibrium of a competitive monetary economy that does not experience any exogeneous shocks whether originating from the external environment or from policy should be modelled as a state that is stationary or perhaps growing at a constant rate seems to be deeply rooted in the mind of some economists

rational choice and erratic behaviour in this paper we show that rational choice in a stationary environment can lead to erratic behaviour when preferences depend on experience we mean by erratic behaviour choice sequences that do not converge to a long run stationary value or to any periodic pattern early investigations of the effects of experience on choice goes back to pareto see also benhabib 1979 some keynesian theories of the consumption function incorporate the effects of experience and habit formation on current levels of consumption duesenberry 1949 modigliani 1949 and brown 1952 a general model of experience dependent choice was described in day 1970 and investigated in day and kennedy 1971 while the specific issue of the existence of stable representable long run consumer demand when tastes vary endogenously has been treated by gorman 1967 pollak 1970 1976 weizsaicker 1971 mccarthy 1974 and hammond 1976 pollak gave conditions for the representability of long run choice when the equations of preference dependence are linear and utility additive hammond in a generalization of these findings provides conditions for stable representable long run choice when preferences are acyclic a condition which in essence assures convergence to a long run choice

are economic time series asymmetric over the business cycle it has long been argued that major cyclical variables such as the unemployment rate display an asymmetric behavior over various phases of the business cycle the paper provides a statistical test for this hypothesis using the framework of finite state markov processes i implement a test to see if the behavior of the unemployment rate is characterized by sudden jumps and slower drops it is argued that the framework provided in the paper can also be used to test other sample path properties of economic time series

inflation expectations and macroeconomic dynamics the case of rational versus extrapolative expectations the motivation of this paper is to understand the effects of coupling a macroeconomic model of inflation rate dynamics relying on an aggregate expectation to a heterogeneous expectations framework a standard macroeconomic textbook model consisting of okun s law an expectations augmented phillips curve and an aggregate demand relation is extended to allow agents the possibility of selecting between different types of forecasting strategies to predict the future inflation rate rules that have produced low prediction errors in the recent past are favored by agents here we consider trend following and rational expectations using a mixture of analytical and numerical tools we investigate the model s dynamics and discuss the conditions under which the extended model leads to endogenous fluctuations in macroeconomic variables some preliminary results are offered for the case in which a taylor like monetary policy rule is included in the model jel classification c61 c62 e31 e32

testable competing hypotheses from structure performance theory efficient structure versus market power this paper provides a structure performance theory that can accommodate leading firm efficiency as well as several competing market power hypotheses the author derive s testable implications distinguishing the simple collusion product differentiation and scale economy hypotheses from the innovative lea ding firm alternative it is shown that recent evidence of a positive market share price cost margin pcm relationship and a nonpositive concentration pcm relationship can reject the scale economy and simpl e collusion hypotheses in homogeneous product markets unfortunately this same evidence cannot reject the product differentiation hypothe sis in favor of leading firm efficiency copyright 1988 by blackwell publishing ltd

managing rational routes to randomness abstract within the seminal cobweb model of brock and hommes firms adapt their price expectations by a profit based switching behavior between free naive 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 such rational routes to randomness by adjusting profit taxes in particular 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

herding a synchronous updating and heterogeneity in memory in a cbs abstract this paper considers a simple continuous beliefs system cbs to investigate the effects on price dynamics of several behavioural assumptions i herd behaviour ii a synchronous updating of beliefs and iii heterogeneity in time horizons memory among agents the recently introduced concept of a cbs allows one to model the co evolution of prices and the beliefs distribution explicitly while keeping track of the unpredictable nature of individual preferences technical report cendef working paper 03 05 university of amsterdam tinbergen institute discussion paper 2003 073 1 as a benchmark model we take a simple cbs which in a market with many traders exhibits a random walk driven by news using the explicit nature of the dynamics of the cbs we show that the introduction of herding modifies the random walk to an arima 0 1 1 process which is observationally equivalent to a reduction of the number of market participants in terms of returns the model predicts ma 1 structure with a negative coefficient a synchronous updating leads to an ma 1 model for returns with garch 1 1 innovations and predicts a relation between the arch and garch coefficients heterogeneity in memory leads to long range dependence in returns in the empirical section we perform a modest reality check concerning the predicted sign of the ma coefficient and the relation between the arch and garch coefficients for exchange rate data

heterogeneous beliefs and the non linear cobweb model abstract this paper generalizes the evolutionary cobweb model with heterogeneous beliefs of brock and hommes 1997 econometrica 65 1059 1095 to the case of non linear demand and supply agents choose between a simple freely available prediction strategy such as naive expectations and a sophisticated costly prediction strategy such as rational expectations and update their beliefs according to an evolutionary fitness measure such as past realized net profits it is shown that for generic non linear monotonic demand and supply curves the evolutionary dynamics exhibits rational routes to randomness that is bifurcation routes to strange attractors occur when the traders sensitivity to differences in evolutionary fitness increases

inter industry differences in profitability the legacy of the structure efficiency debate revisited this study presents a simple model on the sources of inter industry variation in profitability and tests its empirical implications in order to shed new light on the long lasting debate over industry profitability the model identifies four key factors that jointly influence an industry s price cost margin i the intensity of strategic investment e g r d and advertising ii the skewness of the distribution of market share or market concentration iii the appropriability of strategic investment and iv the extent to which firms market shares are determined by the intensity of their strategic investment these factors are expected to be positively related to industry profitability and our empirical analysis provides supportive evidence the model also suggests that the conventional single dimensional hypotheses on profitability the market power or market structure hypothesis and the efficiency hypothesis are overly simplified more importantly existing empirical results allegedly supporting each of these hypotheses are spurious to the extent that the distribution of firm specific strategic competence reflects firm heterogeneity in efficiency and at the same time underlies the distribution of market share or market concentration copyright 2009 oxford university press

on learning and rational expectations in an overlapping generations model abstract this paper investigates whether learning does actually lead to rational expectations in an overlapping generations model with fiat money expectations are formed according to a family of expectations functions containing a rational expectations scheme and indexed by a single parameter this parameter is updated in every period to fit the latest observations one finds that unless the agents have rational expectations to start with expectations will generally not converge towards rational expectations in this simple model

examining the effectiveness of price limits in an artificial stock market abstract this paper proposes an agent based framework to examine the effectiveness of price limits in an artificial stock market the market is composed of many boundedly rational and heterogeneous traders whose learning behavior is represented by a genetic programming algorithm we calibrate the model to replicate several stylized facts observed in real financial markets based on this environment the impacts of price limits are analyzed from the perspectives of volatility price distortion volume and welfare we find that the imposition of price limits possesses both positive and negative effects however compared with the market without price limits appropriate price limits help to reduce volatility and price distortion and increase the liquidity and welfare

on profitability and industrial concentration in pakistan abstract non inclusion of an important element of market structure in the profitability equation by earlier writers might have caused their estimates to suffer from specification error due to an omitted variable we have tried to formulate a more comprehensive model in which elasticity of demand advertising and concentration capture market structure while the supply side has been incorporated by including productivity other factors used to explain the degree of monopoly are capital intensity advertising and trade our results indicate that the main determinants of the profit margin are capital intensity rising productivity and industrial concentration we find that there was some dilution due to competition from foreign trade but its impact has been swayed by other factors

capital intensity and the firm s cost of capital recent reports of negative capital intensity coefficients in struct ure performance equations support allegations of gross measurement error in accounting based measures of economic profitability this paper explores whether specification errors rather than measurement errors alone may explain this anomalous empirical result within a simultaneous equations model of capital intensity cost of capital and price cost margins the author employs hausman specification tests to demonstrate a negative bias on capital intensity and a positive bias on concentration when one omits firm specific cost of capital from price cost margin equations the roles of cost of capital and capital intensity are derived from formal structure performance theory copyright 1988 by mit press

indirect competition with spatial product differentiation although two markets may appear to be separate sometimes one firm participates in both of them that firm provides a link between the two markets such a straddling firm transmits indirect competition from each market to the other since its actions reflect competitive conditions in both markets in a model of spatial product differentiation the author shows that indirect competition may make a market perform significantly better than the number of firms would indicate moreover total consumer surplus increases if two previously distinct markets are linked by a straddler finally the author considers implications of these results for antitrust analysis copyright 1989 by blackwell publishing ltd

monopoly price advertising decision making under uncertainty this paper uses the capital asset pricing model capm to examine the joint price quantity advertising decision for the monopolist under uncertainty a generalized form of uncertainty is treated where the variability of sales volume price depends on the price quantity advertising decision in a flexible manner in contrast previous models horowitz 6 and dehez and jacquemin 3 assume that uncertainty is exogenous the dorfman steiner theorem is generalized to the uncertainty case and the comparative statics properties of the model explored specifically the results are shown to depend on a the precise form in which uncertainty enters the random demand function b the relationship between the risk adjusted price quantity elasticity of demand and advertising and c the covariance of the random cash flow with the random rate of return of the market portfolio unambiguous results are obtained in all cases for the additive and multiplicative uncertainty models for the generalized uncertainty case unambiguous results are obtained for exogenous shifts in demand determinate results are obtained for general changes in risk if the variance of sales volume price increases with price sales volume

on information and market dynamics the case of the u s beef market abstract the paper investigates the nature of dynamic prices and expectations in a competitive market the approach is applied to the u s beef market which exhibits cyclical patterns and significant biological lags in the production process beef price equations are estimated under different expectation regimes the empirical results indicate the presence of heterogeneous price expectations with a significant number of market participants neglecting information about the existence of a beef cycle

a new view of the market structure performance debate ion typically considered in market structure performance studies data on cross sections of firms or industries are unlikely to be sufficiently 2 the question of data selection has been discussed fairly thoroughly by weiss 44 and demsetz i 5 among others although there appears to be little agreement on the direction of bias in the most commonly used samples the question of exogeneity has been less thoroughly discussed although in specific instances e g schmalensee 37 martin 27 it has been dealt with explicitly this content downloaded from 157 55 39 35 on sat 03 sep 2016 05 57 53 utc all use subject to http about jstor org terms 400 james l bothwell thomas f cooley and thomas e hall informative to make such empirical analysis useful it may therefore be more productive to return to industry specific analysis there will undoubtedly be some who are unconvinced by this argument and for them we offer the observation that further empirical studies based on weak deductive foundations are likely to be convincing only to the extent that they account explicitly for the role of prior beliefs and specification uncertainty ii determinants of profitability the conventional market structure conduct performance paradigm has guided vast amounts of empirical research in the field of industrial organization for the past three decades like empirical research in other areas of economics the maintained hypotheses that are considered reflect to a large extent the prior beliefs of the researchers the result is that there is always a suspicion that what is being engaged in is more advocacy than objective empirical analysis in the market structure performance literature the most important alternative prior beliefs maintained hypotheses appear to fall into six categories which we characterize as follows i seller concentration explains profits high rates of return are thought to be caused by monopoly power conferred by high degrees of seller concentration this is the basic collusion specification of bain i 2 seller concentration and entry barriers explain profits high rates of return are thought to reflect monopoly power resulting from both high seller concentration and high barriers to entry this prior comes from the traditional market structure performance paradigm of industrial organization and accounts for the peristence of collusive gains it is prevalent in the work of mann 26 weiss 45 46 comanor and wilson i i qualls 34 1j35 and many other researchers 3 absolute or relative firm size explain profits this prior reflects the demsetz i4 i5 and peltzman 133 notion that high rates of return result from superior firm efficiency or innovativeness and not from oligopolistic collusion and joint profit maximization this prior has also been adopted by others e g shepherd 39 gale i7 who assume that high market shares indicate high barriers to entry 4 risk differentials explain profitability differences this reflects the notion that high rates of return reflect neither monopoly power nor superior efficiency but the payment of positive risk premiums to risk averse investors it underlies much of the work of stigler 4i fisher and hall i6 cootner and holland i3 and many others there are however considerable differences in beliefs about which measure of risk variability of return over time financial leverage or nondiversifiable risk is relevant this content downloaded from 157 55 39 35 on sat 03 sep 2016 05 57 53 utc all use subject to http about jstor org terms the market structure performance debate 40i 5 advertising intensity explains profits this reflects the notion of bloch 4 and others that differences in reported accounting profit rates result from differences in the amounts of omitted intangible capital resulting from advertising expenditures because advertising is assumed by some to be a source of product differentiation this prior also may reflect the belief that the extent of product differentiation is a major determinant of profitability comanor i o schmalensee 13 7 6 growth explains profits this reflects brozen s 6 7 disequilibrium hypothesis that profitability differences result not from monopoly power but from adjustments in capacity lagging behind changes in demand given a particular maintained hypothesis about the most important determinant of profitability there remains uncertainty about the rest of the specification of the model if the results are not robust with respect to uncertainty about the conditioning set of variables then it cannot be concluded that the data are very informative about the hypothesis in question the next section discusses the methodology used to determine whether the results are robust to such specification uncertainty iii specification uncertainty the hypotheses discussed in the previous section all specify the primary determinants of profitability in each case however the investigator must have in mind a set of possible conditioning variables that may or may not belong in the regression although uncertainty about the inclusion or exclusion of such variables is not often explicitly acknowledged it is an inevitable and important aspect of virtually all empirical investigations the primary concern for the problem at hand is the extent to which this specification uncertainty leads to uncertainty in the estimated parameters of primary interest consider the regression model

an empirical examination of heterogeneity and switching in foreign exchange markets using a unique dataset of survey expectations this paper examines the extent to which the classical fundamentalist chartist dichotomy is valid for the foreign exchange market by applying a recursive selection algorithm 1 respondents are classified into the two groups and 2 the forecasting models are endogenously determined within the groups a large part of the variation in expectations can be explained by the fundamentalist chartist distinction switching however takes place between a naive and a sophisticated model that consists of both fundamentalist and chartist elements the sophisticated model is increasingly used as the forecast horizon increases

endogenous fluctuations under evolutionary pressure in cournot competition abstract an evolutionary game theoretic model of cournot competition is investigated individuals choose from a finite set of different behavioral rules each rule specifies the quantity to be produced in the current period as a function of past quantities using more sophisticated rules may require extra information costs based upon realized payoffs the fractions of the population choosing a certain behavioral rule are updated according to the replicator equation with noise the long run behavior of the evolutionary system consisting of the population dynamics coupled with the quantity dynamics of the cournot game may be complicated and endogenous fluctuations may arise we consider a typical example where firms can choose between two rules the nash rule and the best reply rule we show that a homoclinic tangency between the stable and unstable manifold of the equilibrium occurs as evolutionary pressure increases implying bifurcation routes to complicated dynamics and strange attractors

some evidence concerning macroeconomic chaos abstract an empirical assessment of a linear stochastic perspective for canadian macroeconomic time series is presented the methods used are based on the mathematics of chaos present evidence suggests that low order deterministic chaos does not provide a satisfactory characterization of the data the absence of significant nonlinear structure for the investment and unemployment series is of particular note in light of past findings with american data the degree to which the use of a time trend can impose a pseudo structure on the data is illustrated

chaotic learning equilibria chaotic temporary equilibrium trajectories under least squares learning are shown to exist in a standard version of the overlapping generations model theses trajectories show forecast errors that never vanish thus we do not find convergence to an equilibrium in which agents have perfect foresight complex trajectories can even be found in the case of savings functions which are monotonically decreasing in the expected gross rate of inflation in this case no cyclical or chaotic trajectories with perfect foresight exist thus learning alone is a source of chaotic dynamic journal of economic literature classification numbers d83 d84

on the consistency of backward looking expectations the case of the cobweb in dynamic models of economic fluctuations backward looking expectations with systematic forecasting errors are inconsistent with rational behaviour in non linear dynamic models exhibiting seemingly unpredictable chaotic fluctuations however simple habitual rule of thumb backward looking expectation rules may yield non zero but nevertheless non systematic forecasting errors in a chaotic model expectational forecasting errors may have zero autocorrelations at all lags even for rational agents patterns in these forecasting errors may be very difficult to detect especially in the presence of small noise backward looking expectations are then not necessarily inconsistent with rational behaviour we investigate whether simple expectation schemes such as naive or adaptive expectations can be consistent with rational behaviour in the simplest of all non linear dynamic economic models the non linear cobweb model

imperfect foresight and chaos an example of a self fulfilling mistake abstract we consider an overlapping generations economy with a single production sector and a government first we assume that the households have imperfect foresight in the sense that they cannot distinguish between the trajectories of a deterministic chaotic system and a stochastic process it is shown that mistaking a deterministic chaotic system for a stochastic one is a self fulfilling mistake because the possibility of making this mistake arises only when it is made the unique perfect foresight equilibrium is proved to exhibit simple dynamics for most parameter values finally we show that when agents apply simple econometric models to build their expectations the resulting dynamics resemble the chaotic dynamics of the imperfect foresight equilibrium under certain parameter constellations while they are close to the simple dynamics of the perfect foresight equilibrium for other parameter values

carl s nonlinear cobweb abstract this essay surveys some of my work on expectations learning and bounded rationality within the classical cobweb model following early inspiring ideas from carl chiarella in particular i focus on the role of nonlinear dynamics learning and heterogeneity within the cobweb framework and how price fluctuations in the cobweb theory fit with observations of individual and aggregate behaviour from laboratory experiments with human subjects

subjective temporary equilibrium abstract this paper introduces within the framework of a simple example the notion of a subjective temporary equilibrium the underlying relation linking forecasts to equilibrium values of the state variable is linear however agents perceive a non linear law that governs the rate of adjustment between successive periods and forecast using linear approximations to the non linear law of motion this is shown to generate a non linear law of motion for the state variable with the feature that the agent s model describes correctly the period wise evolution of the economy the resulting non linear law of motion is referred to as a subjective temporary equilibrium as its specification is determined largely by the subjective beliefs of the agents regarding the dynamics of the system in a subjective equilibrium agents forecasts are generated by taking linear approximations to a correctly specified law of motion and the forecasts may accordingly be interpreted as being boundedly rational in a first order sense there exist specifications that admit the possibility of cyclical behaviour

cobweb dynamics under bounded rationality this paper discusses recent work on expectation formation in the familiar cobweb hog cycle model a convenient feature of the model is the fact that it has a unique rational expectations equilibrium ree attention will be focused on whether this unique ree can be learned under bounded rationality with agents using simple habitual rule of thumb forecasting rules or whether other approximate rational expectations equilibria can arise where forecasts are although not perfect approximately correct in particular the possibility of chaotic equilibria under bounded rationality will be discussed both the homogeneous agent case and the heterogeneous case with evolutionary competition between different forecasting rules will be discussed recent experimental work on expectations formation in the cobweb economy suggests excess volatility and endogenous possibly chaotic price fluctuations driven by the interaction of competing boundedly rational agents