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A New Look At The Diamond Search Model: Stochastic Cycles And Equilibrium Selection In Search Equilibrium

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  • Aoki, Masanao
  • Shirai, Yoshimasa

Abstract

We recast Diamond's search equilibrium model into that with a finite number of agents. The state of the model is described by a jump-Markov process, the transition rates of which are functions of the reservation cost, which are endogenously determined by value maximization by rational agents. The existence of stochastic fluctuations causes the fraction of the employed to move from one basin of attraction to the other with positive probabilities when the dynamics have multiple equilibria. Stochastic asymmetric cycles that arise are quite different from the cycles of the set of Diamond–Fudenberg nonlinear deterministic differential equations. By taking the number of agents to infinity, we get a limiting probability distribution over the stationary state equilibria. This provides a natural basis for equilibrium selection in models with multiple equilibria, which is new in the economic literature.

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  • Aoki, Masanao & Shirai, Yoshimasa, 2000. "A New Look At The Diamond Search Model: Stochastic Cycles And Equilibrium Selection In Search Equilibrium," Macroeconomic Dynamics, Cambridge University Press, vol. 4(4), pages 487-505, December.
    • Handle: RePEc:cup:macdyn:v:4:y:2000:i:04:p:487-505_01
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    Cited by:

    1. ARATA Yoshiyuki, 2015. "Endogenous Business Cycles Caused by Nonconvex Costs and Interactions," Discussion papers 15085, Research Institute of Economy, Trade and Industry (RIETI).
    2. Aoki, Masanao, 2002. "Open models of share markets with two dominant types of participants," Journal of Economic Behavior & Organization, Elsevier, vol. 49(2), pages 199-216, October.
    3. Sven Banisch & Eckehard Olbrich, 2017. "The Coconut Model with Heterogeneous Strategies and Learning," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 20(1), pages 1-14.
    4. Ausloos, M & Clippe, P & Pekalski, A, 2004. "Model of macroeconomic evolution in stable regionally dependent economic fields," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 337(1), pages 269-287.
    5. Masanao Aoki, 2003. "A Simple Quantity Adjustment Model of Economic Fluctuations and Growth," UCLA Economics Online Papers 232, UCLA Department of Economics.
    6. Yoshiyuki Arata, 2017. "Endogenous business cycles caused by nonconvex costs and interactions," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 12(2), pages 367-391, July.

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