Local coordination under bounded rationality: Coase meets Simon, finds Hayek

This paper explores strategic behavior in a network of firms using an agent-based model. The model exhibits a tension between economic efficiency and the stability of the network in the face of incentives to change its configuration. This tension is to be expected because the conditions of the Coase...

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Main Author: WOODARD, C. Jason
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2010
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Online Access:https://ink.library.smu.edu.sg/sis_research/7046
https://ink.library.smu.edu.sg/context/sis_research/article/8049/viewcontent/Local_Coordination_under_Bounded_Rationality__Coase_Meets_Simon.pdf
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spelling sg-smu-ink.sis_research-80492022-03-29T01:47:00Z Local coordination under bounded rationality: Coase meets Simon, finds Hayek WOODARD, C. Jason This paper explores strategic behavior in a network of firms using an agent-based model. The model exhibits a tension between economic efficiency and the stability of the network in the face of incentives to change its configuration. This tension is to be expected because the conditions of the Coase theorem are violated: the boundedly rational firms in the model lack the ability to discover efficient network configurations or achieve them through collective action. In computational experiments, as predicted by theory, firms frequently became locked into inefficient outcomes or endless cycles of mutual frustration. However, simple institutional innovations such as property rights and side payments dramatically improved outcomes, even for severely myopic firms. The results are consistent with Hayek’s observations about the surprising effectiveness of local coordination in the economy at large, but the mechanism involved is different. Instead of prices, firms in the model exploited the fact that their incentives are partially decoupled by the structure of the network. This finding contributes to the growing body of theory on “loosely coupled” interactions in real-world networks. 2010-03-01T08:00:00Z text application/pdf https://ink.library.smu.edu.sg/sis_research/7046 https://ink.library.smu.edu.sg/context/sis_research/article/8049/viewcontent/Local_Coordination_under_Bounded_Rationality__Coase_Meets_Simon.pdf http://creativecommons.org/licenses/by-nc-nd/4.0/ Research Collection School Of Computing and Information Systems eng Institutional Knowledge at Singapore Management University Complex networks Bounded rationality Institutional economics NKC model Databases and Information Systems Numerical Analysis and Scientific Computing Strategic Management Policy
institution Singapore Management University
building SMU Libraries
continent Asia
country Singapore
Singapore
content_provider SMU Libraries
collection InK@SMU
language English
topic Complex networks
Bounded rationality
Institutional economics
NKC model
Databases and Information Systems
Numerical Analysis and Scientific Computing
Strategic Management Policy
spellingShingle Complex networks
Bounded rationality
Institutional economics
NKC model
Databases and Information Systems
Numerical Analysis and Scientific Computing
Strategic Management Policy
WOODARD, C. Jason
Local coordination under bounded rationality: Coase meets Simon, finds Hayek
description This paper explores strategic behavior in a network of firms using an agent-based model. The model exhibits a tension between economic efficiency and the stability of the network in the face of incentives to change its configuration. This tension is to be expected because the conditions of the Coase theorem are violated: the boundedly rational firms in the model lack the ability to discover efficient network configurations or achieve them through collective action. In computational experiments, as predicted by theory, firms frequently became locked into inefficient outcomes or endless cycles of mutual frustration. However, simple institutional innovations such as property rights and side payments dramatically improved outcomes, even for severely myopic firms. The results are consistent with Hayek’s observations about the surprising effectiveness of local coordination in the economy at large, but the mechanism involved is different. Instead of prices, firms in the model exploited the fact that their incentives are partially decoupled by the structure of the network. This finding contributes to the growing body of theory on “loosely coupled” interactions in real-world networks.
format text
author WOODARD, C. Jason
author_facet WOODARD, C. Jason
author_sort WOODARD, C. Jason
title Local coordination under bounded rationality: Coase meets Simon, finds Hayek
title_short Local coordination under bounded rationality: Coase meets Simon, finds Hayek
title_full Local coordination under bounded rationality: Coase meets Simon, finds Hayek
title_fullStr Local coordination under bounded rationality: Coase meets Simon, finds Hayek
title_full_unstemmed Local coordination under bounded rationality: Coase meets Simon, finds Hayek
title_sort local coordination under bounded rationality: coase meets simon, finds hayek
publisher Institutional Knowledge at Singapore Management University
publishDate 2010
url https://ink.library.smu.edu.sg/sis_research/7046
https://ink.library.smu.edu.sg/context/sis_research/article/8049/viewcontent/Local_Coordination_under_Bounded_Rationality__Coase_Meets_Simon.pdf
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