Faculty of Economics and Business Administration Publications Database

When Is Rational Behavior Consistent with Rules of Thumb? A Link between Evolutionary Terminology and Neoclassical Methodology

Volume: 32
Number: 1
Pages: 131 - 144
Month: August
ISSN-Print: 0304-4068
Link External Source: Online Version
Year: 1999
Keywords: Economic theory; Evolutionary economics; Industry dynamics; Markov game; Rules of thumb
Abstract: In this article, a dynamic industry with optimizing interacting firms is formulated as a Markov game. It is shown that a suitable specification of the state space and the interaction structure leads to constant optimal decisions or routine behavior of all firms. This result depends on two crucial assumptions, the homogeneity of the state space and the linearity of the payoff functions. These assumptions may be interpreted as one possibility to understand bounded rationality. Myopic expectations according to the entry-exit process lead to a similar result in the extended entry-exit model. Hence, neoclassical methods are merged with evolutionary terminology.