Evolutive Economic Dynamics and Social Interactions: Theory and Econometrics

University Of Wisconsin-Madison, Madison WI

Investigators

Abstract

We propose research on three analytically related topics: 1. Dynamics of Expectational Diversity: Theory and Econometrics; 2. Dynamics of Social Interactions: Theory and Econometrics; 3. Management of Dynamical Systems in Ecology. All three are unified by dynamical complexities raised by a hierarchy of spatial and temporal scales where measures of spatial size of an activity relate to how fast the particular activity reaches a steady state with slower "relaxation times" associated with larger spatial ranges. The forces that determine the dynamics of expectational diversity on, for example, future values of assets and future paths of inflation, across time and across different groups are poorly understood. Yet the impact of policy initiatives in regulation of trading in asset markets and management of inflation policy, depend upon the dynamics of the formation of expectations across time and across different groups in the economy. Temporal/spatial hierarchies of dynamics easily lead to partial irreversibilities, abrupt changes, alternative stable states, and other complicated phenomena. These challenge conventional attitudes concerning burden of proof in government policy formation on managing such complicated dynamical systems. For example, in managing a problem like potential global warming, the optimal placement of the burden of proof on strength of evidence depends upon the degree of irreversibility of potential climate damage. So, the degree of potential irreversibility must be measured. Similar issues arise in many less dramatic management problems. For this reason my research will stress development of econometric and statistical inference methods appropriate to systems with hierarchical time/spatial scales. Our research also hopes to contribute to policy formation in the management of dynamic systems by building training models to assist economists and other policy makers so that they may be trained to work with such systems in much the same way that a flight simulator trains airplane pilots. In summary, my proposed research is to develop basic theory and statistical inference tools designed to confront issues raised by complexity caused by temporal/spatial dynamical connections and apply the findings to policy.