Equilibrium, Expectations & Dynamics

Programme directors: Prof. dr. C.H. Hommes & Prof. dr. C.G.H. Diks

Programme design

The objective of the programme is the development of (mathematical) economic theory, focussing on the understanding of economic processes. The programme aims at developing models of economic behaviour in different areas of economics, including microeconomics, macroeconomics and finance. Emphasis is given to behavioural models of dynamic market phenomena.

The research group employs a multi-disciplinary approach. The models are studied both from a theoretical and a computational perspective, and the validity of the models is tested in laboratory experiments with human subjects as well as empirically using real data. The NWO Vernieuwingsimpuls Information Flows in Financial Markets, the EU STREP project Financial Markets and Complexity and the NWO-VIDI programme Structural Stability in Economic Dynamics are part of the research programme.

The programme can be subdivided into five closely related and interacting research themes:

Equilibrium theory

Individual optimising behaviour of economic agents generates aggregate supply and demand of commodities, as a function of prices and individual expectations. In equilibrium supply and demand are equal. Many types of equilibrium can be studied: partial versus general, competitive versus monopolistic, dynamic versus static, temporary equilibrium, single, representative agent as well as heterogeneous, interacting agents equilibria. The existence of equilibria is studied, as well as conditions for stability or instability of dynamic adjustment processes.

Game theory & Industrial organisation

This part of the programme focuses on modelling strategic behaviour of economic agents in markets with imperfect competition, such as duopoly and oligopoly. Equilibria in non-cooperative games (e.g. duopoly, oligopoly) as well as cooperative games (costs sharing, general equilibrium) are studied. Evolutionary games with heterogeneous, boundedly rational strategies competing against each other are also studied.

Expectations and learning

Bounded rationality models of expectation formation and learning schemes are becoming a serious alternative to rational expectations, which was the dominating paradigm until quite recently. The fully rational representative agent is replaced by a large heterogeneous population of boundedly rational interacting agents, who form expectations based upon time series observations and update their forecasting rules according to new observations and new information about market fundamentals. Conditions under which learning schemes converge to rational expectations or to a boundedly rational expectations equilibrium with excess volatility are investigated. Formation of expectations is studied in theory, in laboratory experiments with human subjects and in real markets.

Nonlinear economic dynamics

This part of the programme focuses on nonlinear complexity models of dynamic market phenomena. Are market fluctuations mainly caused by random exogenous shocks, or can endogenous nonlinear economic laws of motionexplain (a significant part of) the fluctuations? Various deterministic and stochastic economic models are studied theoretically, computationally as well as empirically, attempting to explain the most important stylised facts observed in real economic and financial time series. Emphasis is given to complex adaptive systems where markets consist of a large population of agents selecting simple strategies according to their relative success in the recent past. In these evolutionary adaptive systems endogenous variables such as prices and agents’ beliefs co-evolve over time.

Dynamic optimisation

Emphasis is given to dynamic optimisation problems in environmental economics, characterised by a conflict between economic benefits and ecological costs. Tools from nonlinear dynamics and bifurcation theory are employed to investigate non-convex dynamic optimisation problems. The main thrust is a structural analysis, that is, investigation of the global solution structure of dynamic optimisation problems and dynamic games. The qualitative changes of these solutions are studied under changes of the parameters. Geometrical methods, like bifurcation theory, normal form theory and perturbation theory, as well as numerical methods yield insights that hold not just at isolated parameter values, but for the complete parameter set.

Published by  Economics and Business

13 December 2016