On economic applications of the genetic algorithm: a model of the cobweb type

Abstract.

This paper explores the idea of using artificial adaptive agents in economic theory. In particular, we use Genetic Algorithms (GAs) to model the learning behavior of a population of adaptive and boundedly rational agents interacting in an economic system. We analyze the behavior of a GA in two versions of a model of the cobweb-type, one in which firms make only quantity choices, and the other one in which firms first decide to exit or to stay in the market, and subsequently decide how much to produce. We present simulations with different coding schemes and interpret the rather surprising differences between the results for different setups by employing the mathematical theory for GAs with state-dependent fitness functions. In particular, we explain the relationship between coding and convergence properties of GAs.