Papers on Economic Agent-Based simulation

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Introduction to Walrasian General Equilibrium Modeling

Paper by Tesfatsion (8/06/08)

  • Decentralize market economies are complex dynamic systems made up of micro agents taking part in local interactions.
    • This creates global regularities
      • e.g. employment and growth rates, income distributions, market institutions, and social conventions
      • Creates interdependent feedback loops
  • Walrasian equilibrium model common way macroeconomists model the economy
    • Consists of finite profit-maximizing firms, finite consumers with exogenously determined preferences, and a Walrasian Auctioneer
    • 9 Basic Assumptions for Walrasian Equilibrium Model
      • 1)Fixed finite number of consumption and capital goods. All goods are private, excludable, and rival
      • 2)Fixed number of consumer agents with preferences over different bundles of goods and nonnegative initial endowments of capital goods and labor
      • 3)Preferences of consumer can be represented by a utility function
      • 4)Fixed number of firms
      • 5)Income of consumers comes from dividends and sale of services
      • 6)Markets are complete
      • 7)Consumers take prices as given
      • 8)Firms take prices as given
      • 9)All purchase and sale agreements are costlessly arranged and enforced
  • Simple WGE Illustration
    • The market is said to be a Walrasian equilibrium if it satisfies the following four conditions
      • At a specific vector e* comprising consumer supplies and demands for services and consumption goods, firm demands and supplies for services and consumption goods, non negative prices, expected prices, and expected dividends
        • Each consumer is maximizing his utility and each firm is maximizing its profits
        • Expected prices coincide with actual prices and expected dividends coincide with actual dividends
        • Excess supply is greater than or equal to zero
        • The total value of excess supply is zero
  • Pareto Efficiency and the First Welfare Theorem
    • How do we measure a person's welfare?
      • Productive efficiency vs. Pareto-effiency
      • Any Walrasian economy is Pareto efficient
  • Robustness of the WGE
    • The Walrasian general equilibrium model eliminates the need for economic agents to interact strategically
    • Three Questions
      • 1)How might strategic interaction become important if firms set prices for their inputs and outputs?
      • 2)How might expectations and learning rules become important if firms set prices for their inputs and outputs?
        • Information exploitation and exploration
      • 3)How might bankruptcy rules, rationing rules, and inventory management become important if firms set prices for their inputs and outputs?

The paper can be found here.


Non-Walrasian Equilibrium: Illustrative Examples

Paper by Tesfatsion (7/31/08)

  • Do all markets always clear, or can there be equilibrium without total market clearing?
  • Keynesian equilibrium
    • Those with incentive to change state have no power to, those who have power to change stare have no incentive
    • Multiple possible equilibrium states
  • Signaling problems
    • Incomplete signaling
      • Do not signal what future actions might be, so others have to make investment decisions that might be wrong
    • Signaling not credible
      • Even if signal today, not credible unless backed today by purchasing power
  • Dynamic Stochastic General Equilibrium (DSGE) Model
    • Allows disequilibrium, due to shocks
    • Equilibrium would exist without shocks
    • Tends toward equilibrium in the long run
  • Involuntary Unemployment
    • Wage/labor not in equilibrium
    • Those with incentive to change state have no power to, those who have power to change stare have no incentive
      • Unemployment equilibrium
    • Optimism/pessimism about future signals can affect this equilibrium
  • Demand Signaling
    • How do customers signal future demand?
    • Need current purchasing power to
    • Liquidity constraints
    • Clower: liquidity and credit constraints can lead to persistent involuntary unemployment due to signaling problems
      • People can’t work as much as they want
      • Can’t borrow vs. future income
  • Effective Equilibrium
    • Holds given
      • Consumer and firm on effective demand and supply curves
      • All price and dividend expectations are fulfilled
      • Effective supply is at least at great as effective demand
    • Firm as price taker in wage
      • Would not lower unless perceived high employment supply
  • Coordination Failure
    • Mutual gains not realized because no individual has incentive to change from current behavior
    • Can be Nash Equilibrium, but not Pareto efficient

The paper can be found here.


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