ABSTRACT
This chapter takes a fresh look at economic phenomena with multiple equilibria, and some of the issues associated with modeling asymmetrical business cycles. It summarizes an approach proposed in Aoki (1996, 1998), which is based on using continous time Markov chains and illustrates the advantages of using models with at most countable state spaces to answer these questions. The main advantage of employing models with a finite number of agents is simplicity in clarifying the issue of asymmetrical oscillation and naturalness of the criterion proposed for equilibrium selection. Two examples are presented to illustrate the proposed method. One is a binary choice model in which agents choose one of two alternative decisions or behavioral rules. Agents’ decisions are interdependent due to externalities, such as congestion, bandwagon, group sentiments, network externalites and the like. The other example is a finite agent version of Diamond’s search model, Diamond (1982).
