A new look at the Diamond search model: Stochastic cycles and equilibrium selection in search equilibrium

Masanao Aoki, Yoshimasa Shirai

Research output: Contribution to journalArticle

13 Citations (Scopus)

Abstract

We recast Diamond's search equilibrium model into that with a finite number of agents. The state of the model is described by a jump-Markov process, the transition rates of which are functions of the reservation cost, which are endogenously determined by value maximization by rational agents. The existence of stochastic fluctuations causes the fraction of the employed to move from one basin of attraction to the other with positive probabilities when the dynamics have multiple equilibria. Stochastic asymmetric cycles that arise are quite different from the cycles of the set of Diamond-Fudenberg nonlinear deterministic differential equations. By taking the number of agents to infinity, we get a limiting probability distribution over the stationary state equilibria. This provides a natural basis for equilibrium selection in models with multiple equilibria, which is new in the economic literature.

Original languageEnglish
Pages (from-to)487-5050
Number of pages4564
JournalMacroeconomic Dynamics
Volume4
Issue number4
Publication statusPublished - 2000 Dec 1

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Keywords

  • Asymmetric cycles
  • Equilibrium selection
  • Fokker-Planck equations
  • Jump-Marakov processes
  • Search equilibrium

ASJC Scopus subject areas

  • Economics and Econometrics

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