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Small Deviations from Maximizing Behavior in a Simple Dynamic Model

Asher Wolinsky
The Quarterly Journal of Economics
Vol. 109, No. 2 (May, 1994), pp. 443-464
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/2118469
Page Count: 22
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Small Deviations from Maximizing Behavior in a Simple Dynamic Model
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Abstract

The motivating intuition is that the presence of nonmaximizing agents induces maximizing agents to take advantage of them, and that this might magnify the effect of small deviations from maximizing behavior. This intuition is explored using a simple dynamic model. With an inflexible entry process, small deviations from maximizing behavior may have a substantial impact on the allocation of gains from trade. With a flexible entry process, the effect is dampened by adjustments in entry. Yet these deviations result in a first-order efficiency loss, in contrast to the second-order loss that one would expect from looking at standard static models.

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