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Rational Versus Adaptive Expectations in an Agent-Based Model of a Barter Economy

  • Shyam Gouri SureshEmail author
Conference paper
Part of the Springer Proceedings in Complexity book series (SPCOM)

Abstract

To study the differences between rational and adaptive expectations, I construct an agent-based model of a simple barter economy with stochastic productivity levels. Each agent produces a certain variety of a good but can only consume a different variety that he or she receives through barter with another randomly paired agent. The model is constructed bottom-up (i.e., without a Walrasian auctioneer or price-based coordinating mechanism) through the simulation of purposeful interacting agents. The benchmark version of the model simulates homogeneous agents with rational expectations. Next, the benchmark model is modified by relaxing homogeneity and implementing two alternative versions of adaptive expectations in place of rational expectations. These modifications lead to greater path dependence and the occurrence of inefficient outcomes (in the form of suboptimal over- and underproduction) that differ significantly from the benchmark results. Further, the rational expectations approach is shown to be qualitatively and quantitatively distinct from adaptive expectations in important ways.

Keywords

Rational expectations Adaptive expectations Barter economy Path dependence Agent-based modeling 

Notes

Acknowledgements

I would like to thank anonymous reviewers for their invaluable suggestions. I would also like to acknowledge my appreciation for the helpful comments I received from the participants of the 20th Annual Workshop on the Economic Science with Heterogeneous Interacting Agents (WEHIA) and the 21st Computing in Economics and Finance Conference.

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Copyright information

© Springer Nature Switzerland AG 2018

Authors and Affiliations

  1. 1.Davidson CollegeDavidsonUSA

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