Economic Theory with 'Bottom Up' Models: Comparative Dynamics, Testing and Verification

Benedikt Stefansson - University of California at Los Angeles

Analytical economic models have traditionally been based on an aggregative or 'top down' view of economic behavior, where the microeconomic structure of markets, organization and decision making is not accounted for. 'Bottom-up' or 'process-based' models allow more detailed analysis of the mechanics of agent behavior within organizations or across markets.

Analysis of these models poses interesting challenges. The traditional analytical method often employs some form of comparative static analysis to verify theoretical relationships in the model. Bottom-up modeling demands methods which allow theorists to study complex dynamic relationships and test robustness with respect to both computational and economic assumptions.

In this paper I study experiments with an object-oriented simulation model of dynamics in a differentiated product market. The paper analyzes how theoretical and computational assumptions affect behavior in the model, and discusses methods to test and verify results from bottom-up simulation models.

Scheduled for Session 1.6 Model Of Bounded Rationality