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Entrepreneurship, search costs, and ecological rationality in an agent-based economy

Abstract

Since Coase’s paper on the firm, transaction costs have occupied much attention as a field of economic inquiry. Yet, with few exceptions, neoclassical theory has failed to integrate transaction costs into its core. The dominant mode of theorizing depends upon Brouwer fixed points which cannot integrate transaction costs in more than a superficial manner. Agent-based modeling presents an opportunity for researchers to investigate the nature of transaction costs and integrate them into the core of economic theory. To the extent that transaction costs reduce economic efficiency, they provide opportunities for entrepreneurs to earn a profit by reducing these costs. We employ an extension of Epstein and Axtell’s (1996) Sugarscape to demonstrate this point one type of transaction costs: search costs. When agents do not face the cost of finding a trading partner, the system quickly reaches a steady state with tightly constrained prices regardless of agent production strategies. When search costs are present, entrepreneurs may use competing strategies for production and exchange that allow them to earn higher revenues than they would earn otherwise. These cost reducing innovations tend to promote concatenate coordination (Klein 2012). The agent’s production strategies represent technology in the form of mental models (Denzau and North 1994) that shape agent action with regard to the agent’s environment. The success of these are dependent on their ability to overcome search costs. The average profit, market rate of return, earned by each of these mental structures tends to equalize as a result of competition.

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Notes

  1. A steady-state exists when the inflow of commodities over an extended period tend to equal the outflow.

  2. One exception in neo-classical theory includes Franklin Fisher (1983)

  3. At the next higher level of abstraction, the market, profit and loss select out unsuccessful strategies and retain strategies that promote success.

  4. Mises refers to this as “quasi-action”:

    We observe two things: first the inherent tendency of a living organism to respond to a stimulus according to a regular pattern, and second the favorable effects of this kind of behavior for the strengthening or preservation of the organism’s vital forces. If we were in a position to interpret such behavior as the outcome of purposeful aiming at certain ends, we would call it action and deal with it according to the teleological methods of praxeology.

  5. As of March 8, 2016, Google Scholar identifies that Epstein and Axtell (1996) has been cited 4240 times.

  6. Thus we should think of the death of an agent as equivalent to the bankruptcy of a firm.

  7. One could imagine arrangement where an agent attempts to match the ratio of target reserve levels to consumption ratios or any number of other strategies. This represents an unexploited profit opportunity that I invite others to explore.

  8. The price of water is the inverse of the price of sugar

  9. In the real world, the best indicator is cambiodiversity which is “diversity in the things traded (Koppl et al. 2015).” The model here includes only two goods.”

  10. This includes non-augmented Switchers, Switcher Herders, Switcher Arbitrageurs, and Switcher Herder Arbitrageurs.

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Correspondence to James Caton.

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Caton, J. Entrepreneurship, search costs, and ecological rationality in an agent-based economy. Rev Austrian Econ 30, 107–130 (2017). https://doi.org/10.1007/s11138-016-0351-2

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  • DOI: https://doi.org/10.1007/s11138-016-0351-2

Keywords

  • Entrepreneurship
  • Agent-based computational economics
  • Catallaxy
  • Ecological rationality
  • Search costs

JEL classification

  • L26
  • C63
  • D81
  • D83
  • D84