Stochastic Stability in Networks and Markets

• Applicant: Professor Dr. Carlos Alós-Ferrer
• Subject Area: Economic Theory
• Term: from 2016 to 2021
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 273553573

In the last 25 years, the theory of learning in games has become one of the major modeling tools for the analysis of bounded rationality and economic behaviour. Most models rely on a technique known as stochastic stability, where agents are endowed with boundedly rational behavioural rules (for example imitation, myopic best reply, or reinforcement) and the possibility of decision mistakes is explicitly incorporated. Formally, this results in a family of perturbed, discrete-time Markov chains which enable the analysis of long-run behaviour and the stability of economic outcomes. A large number of results have been obtained in this literature. Applications include equilibrium selection in abstract games, oligopoly theory, signaling and insurance markets, contest theory, and network formation, among many others. However, with only a few exceptions, the literature has not identified general principles. Changes in the basic models, which are possible along a staggering number of possible dimensions, alter the results from research article to research article. Those changes range from the substantial (global vs. local interactions; length of agents' memory) to the purely technical (revision opportunities; tie-breaking assumptions). Building upon the Principal Investigator's extensive experience on this field, the project proposes a specific strategy to identify the general principles underlying economically relevant results in the joint space of games, behavioural rules, and interaction structures. Those include, but are not limited to: (i) the selection of efficient outcomes in coordination games as those underlying technology choice or economic effort levels; (ii) the stability of so-called finite-population, evolutionarily stable states, which predict more competitive outcomes than Nash equilibria in e.g. oligopolistic competition; (iii) the survival of cooperative outcomes in socioeconomic contexts. In addition to this basic theoretical strategy, the project proposes two further lines. The first one concentrates on games on networks, that is, takes explicitly into account that economic interactions are local in nature. The aim is to obtain full characterizations of the network characteristics leading to each class of economic outcomes. This includes the distinction between interaction and information, that is, the possibility of information spillovers. The second one considers the selection, evolution, and design of market institutions (as e.g. B2B market platforms) when traders are boundedly rational. The agenda for this later research line includes carrying out market experiments in the behavioural laboratory.

• DFG Programme: Research Grants
• International Connection: Belgium, Switzerland
• Cooperation Partner: Professor Georg Kirchsteiger