Physical Sciences and Mathematics Commons^™

Local Coordination Under Bounded Rationality: Coase Meets Simon, Finds Hayek, C. Jason Woodard

Research Collection School Of Computing and Information Systems

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 …