Policy Instruments for Evolution of Bounded Rationality: Application to Climate-Energy Problems

Nannen, Volker and van den Bergh, Jeroen C. J. M. (2010): Policy Instruments for Evolution of Bounded Rationality: Application to Climate-Energy Problems. Published in: Technological Forecasting & Social Change , Vol. 77, (January 2010): pp. 76-93.

Abstract

We demonstrate how an evolutionary agent-based model can be used to evaluate climate policies that take the heterogeneity of strategies of individual agents into account. An essential feature of the model is that the fitness of an economic strategy is determined by the relative welfare of the associated agent as compared to its immediate neighbors in a social network. This enables the study of policies that affect relative positions of individuals. We formulate two innovative climate policies, namely a prize, altering directly relative welfare, and advertisement, which influences the social network of interactions. The policies are illustrated using a simple model of global warming where a resource with a negative environmental impact—fossil energy—can be replaced by an environmentally neutral yet less cost-effective alternative, namely renewable energy. It is shown that the general approach enlarges the scope of economic policy analysis.

• Item Type: MPRA Paper
• Language: English
• Keywords: agent-based modeling; behavioral economics; climate policy; evolutionary economics; relative welfare; social network
• Subjects: B - History of Economic Thought, Methodology, and Heterodox Approaches > B5 - Current Heterodox Approaches > B52 - Institutional ; Evolutionary; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q54 - Climate ; Natural Disasters and Their Management ; Global Warming; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H23 - Externalities ; Redistributive Effects ; Environmental Taxes and Subsidies; C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C73 - Stochastic and Dynamic Games ; Evolutionary Games ; Repeated Games; H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H32 - Firm

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