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Empirical models, rules, and optimization

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  • Cattaneo, Andrea
  • Robinson, Sherman

Abstract

This paper considers supply decisions by firms in a dynamic setting with adjustment costs and compares the behavior of an optimal control model to that of a rule-based system which relaxes the assumption that agents are explicit optimizers. In our approach, the economic agent uses believably simple rules in coping with complex situations. We estimate rules using an artificially generated sample obtained by running repeated simulations of a dynamic optimal control model of a firm's hiring/firing decisions. We show that (i) agents using heuristics can behave as if they were seeking rationally to maximize their dynamic returns; (ii) the approach requires fewer behavioral assumptions relative to dynamic optimization and the assumptions made are based on economically intuitive theoretical results linking rule adoption to uncertainty; (iii) the approach delineates the domain of applicability of maximization hypotheses and describes the behavior of agents in situations of economic disequilibrium. The approach adopted uses concepts from fuzzy control theory. An agent, instead of optimizing, follows Fuzzy Associative Memory (FAM) rules which, given input and output data, can be estimated and used to approximate any non-linear dynamic process. Empirical results indicate that the fuzzy rule-based system performs extremely well in approximating optimal dynamic behavior in situations with limited noise.

Suggested Citation

  • Cattaneo, Andrea & Robinson, Sherman, 2000. "Empirical models, rules, and optimization," TMD discussion papers 53, International Food Policy Research Institute (IFPRI).
    • Handle: RePEc:fpr:tmddps:53
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    Cited by:

    1. Robinson, Sherman & El-Said, Moataz, 2000. "GAMS code for estimating a social accounting matrix (SAM) using cross entropy methods (CE)," TMD discussion papers 64, International Food Policy Research Institute (IFPRI).
    2. Diaz-Bonilla, Eugenio & Thomas, Marcelle & Robinson, Sherman & Cattaneo, Andrea, 2000. "Food security and trade negotiations in the World Trade Organization," TMD discussion papers 59, International Food Policy Research Institute (IFPRI).
    3. Morley, Samuel A., 2001. "What has happened to growth in Latin America," TMD discussion papers 67, International Food Policy Research Institute (IFPRI).

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