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Agent-Based Economic Model

Model Overview

This model simulates an economy with three interconnected sectors: capital goods production, consumption goods production, and a labor market. The model uses an agent-based approach with discrete time steps and a fixed number of agents in each sector.

Sectors and Markets

  1. Capital Goods Sector (Sector 1)

    • Produces capital goods using labor as input
    • Sellers in the capital market
    • Buyers in the labor market

  2. Consumption Goods Sector (Sector 2)

    • Produces consumption goods using capital and labor as inputs
    • Buyers in the capital market
    • Buyers in the labor market
    • Sellers in the consumption market

  3. Labor Market

    • Workers are sellers
    • Both Sector 1 and Sector 2 firms are buyers

Production Functions

  • Both firm types use Cobb-Douglas production functions
  • Capital goods firms: capital elasticity of 0
  • Consumption goods firms: capital elasticity of 0.5

Agent Decision-Making

Firms

  • Solve intertemporal profit maximization problems for production and investment decisions
  • Use simple AR projections for future prices and quantities
  • Intertemporal decision-making

Workers

  • Solve utility maximization problems for labor supply, consumption, and savings
  • Cobb-Douglas utility function between consumption and leisure

Expectations

  • Used AR expectations initially, but now using adaptive expectations for firms.
  • Optimisation done based on expectations

Market Clearing Mechanism

Inputs

  • Buyers: quantity demanded, desired price, max price
  • Sellers: quantity supplied, desired price, min price

Process

  1. Round 1: Transactions occur at desired prices
  2. Round 2: Adjustments based on market conditions
    • Excess demand: Sellers have advantage, buyers use max price
    • Excess supply: Buyers have advantage, sellers use min price

Price Adjustment Algorithms

Buyers

  • If demand not met: Increase desired price
  • If demand met:
    • Clearing price > desired price: Increase desired price
    • Clearing price < desired price: Decrease desired price

Sellers

  • If supply not cleared: Lower desired price
  • If supply cleared:
    • Clearing price > desired price: Increase desired price
    • Clearing price < desired price: Decrease desired price

Heuristic Adjustment

  • Buyers: Based on actual_consumption / desired_consumption
  • Sellers: Based on actual_sales / desired_sales
  • Both: Consider clearing_price / desired_price ratio

Model Equilibrium

The model aims to produce endogenous competitive prices in each market. Agents have limited information:

  • Clearing prices in each market
  • Aggregate expected demand and supply
  • Latent market demand, supply, and price

Open Questions

  • Is this mechanism sufficient to produce an equilibrium with competitive markets?
  • How does the limited information available to agents affect market outcomes?