Abstract
Question — This paper investigates what decision rules maximise the individual survivability and welfare of each agent type in a single-sector Keynesian agent-based model, and what aggregate outcome emerges when all agent types simultaneously follow their individually-optimal strategies. Using a grid search over key decision parameters for households, firms, and banks, survival-maximising rules are identified empirically, without imposing theoretical equilibrium conditions.
Approach — For each agent type in isolation, a grid search identifies the parameter combination that maximises a composite survivability score (incorporating survival rate, wealth accumulation, profit, and financial stability) against the bounded-rational baseline economy. The survival-optimal rules for households, firms, and banks are then activated simultaneously to form the “all-best economy”, whose aggregate outcomes are compared to the baseline and to the coordination failure documented in the companion paper.
Result — The all-best economy produces aggregate outcomes that diverge markedly from the bounded-rational baseline: GDP growth is lower (1.60% vs. 4.60%), unemployment is higher (1.29% vs. 0.24%), and mean firm profit turns negative (−$9.21 vs. +$4.20) despite each agent following individually-optimal rules. Paradoxically, zero lower bound frequency declines as credit demand collapses rather than as a result of improved monetary traction.
Implication — The coordination failure identified in the companion paper does not depend on the theoretical-optimality assumption; it is a structural property of decentralised individual optimisation in a Keynesian economy. Bounded rationality acts not merely as a modelling convenience, but as a structural stabiliser maintaining the consumption and credit flows required for aggregate coherence. JEL codes: C63, E12, E32, C61.
Introduction
A central question in macroeconomics is whether individually rational behaviour aggregates to socially desirable outcomes. In Keynesian models with strategic complementarities, the answer is generically no. But the mechanism and severity of the failure depend critically on the decision rules agents actually use.
Two Attractor States
The simulation identifies two stable attractor states: a coordinated equilibrium under bounded-rational rules (GDP 4.60%/yr, unemployment 0.24%, firm bankruptcy 0.27%/yr, mean profit +$4.20) and a decentralised equilibrium under survival-optimal rules (GDP 1.60%/yr, unemployment 1.29%, firm bankruptcy 4.73%/yr, mean profit −$9.21). Both states are stable across 50 Monte Carlo seeds: the coordination failure is a genuine long-run attractor, not a transitional trajectory.
This paper builds directly on the companion paper (Paper 1), which established the baseline model and documented the persistent ZLB result. The present paper asks a different question: what happens when, instead of bounded-rational heuristics, each agent type adopts the strategy that best serves its own survival? The grid search methodology identifies these strategies empirically, without imposing Nash equilibrium or rational-expectations conditions.
The result connects to three strands of literature: Diamond’s (1982) multiplicity of equilibria in search economies, the coordination failure literature following Cooper and John (1988), and the recent macro-ABM literature documenting bounded rationality as a stabiliser (Dosi et al. 2010, 2013, 2015; Fagiolo and Roventini 2017).
Methods
- Composite Survivability Score — Each agent type is evaluated by a composite score that aggregates multiple welfare dimensions: household score weights survival rate, median wealth, and consumption stability; firm score weights survival rate, mean profit, and employment; bank score weights survival rate, capital adequacy, and net interest income. All components are normalised to [0,1] and combined with equal weights. The composite score at the bounded-rational baseline is used as the reference (score = 0.61 for households, 0.58 for firms, 0.55 for banks). Multi-objective Welfare Normalised Score Empirical Optimisation
- Grid Search Protocol — For each agent type, a discrete grid is constructed over the four most consequential decision parameters. For households: savings propensity σ ∈
{0.05, 0.10, 0.15, 0.20}, risk aversion ρ ∈{0.20, 0.40, 0.60, 0.70}, habit η ∈{0.50, 0.70}, wage decay δ_W ∈{0.02, 0.05}. Each grid point is evaluated over a 10-year simulation run against the bounded-rational baseline economy. The grid point achieving the highest composite score is identified as the survival-optimal strategy. 4-parameter Grid 10-year Evaluation Against Baseline Economy - The All-Best Economy — After identifying survival-optimal rules for each agent type in isolation, all three agent types are simultaneously assigned their best-found parameter vectors. This “all-best economy” is then simulated for 10 years across 50 Halton-seed Monte Carlo draws, producing stable aggregate statistics that characterise the decentralised equilibrium. The result is compared to the bounded-rational baseline and to the theoretical-optimal coordination failure documented in Paper 1. Simultaneous Optimisation 50-seed Monte Carlo Decentralised Equilibrium
Results
The grid search identifies survival-maximising strategies for each agent type that are individually coherent but collectively destructive when activated simultaneously.
Per-Agent Best Strategies
Households raise savings propensity fourfold (σ = 0.20 vs. 0.05), triple risk aversion (ρ = 0.70 vs. 0.20), and halve reservation-wage decay (δ_W = 0.02 vs. 0.05). Firms cut investment 70% (χ = 0.03 vs. 0.10), raise R&D tenfold (φ = 0.05 vs. 0.005), and loosen hiring threshold. Banks cut risk premium 80% (ζ_B = 0.10 vs. 0.50), contract lending appetite (0.50 vs. 0.80), and raise CAR floor to 12%.
All-best aggregate outcomes: When all three agent types adopt survival-optimal rules simultaneously, GDP growth falls from 4.60%/yr to 1.60%/yr (−65.2%), unemployment rises from 0.24% to 1.29%, firm bankruptcy rate surges from 0.27% to 4.73%/yr (a 17.5× increase), and mean firm profit turns negative (−$9.21 vs. +$4.20). The decentralised equilibrium is stable across all 50 Monte Carlo seeds.
The Paradox: Household Wealth Rises
Median household wealth rises 76% in the all-best economy (from $3,842 to $6,757), confirming that the failure is not one of individual welfare but of social welfare aggregated across all agent types. Households rationally defect from the coordinated consumption path; the cost is borne collectively by firms and, in the long run, by households themselves as the productive base that supports their income erodes. ZLB frequency paradoxically declines as credit demand collapses rather than as a result of improved monetary traction.
Historical Case Studies
Three historical episodes confirm that the demand-deficiency mechanism identified computationally is not a model artefact but a recurring structural feature of advanced economies.
Japan’s Lost Decades (1991–2003): Following the asset bubble collapse, Japanese households dramatically raised savings rates (precautionary motive), banks contracted credit despite near-zero interest rates, and firms slashed investment. Each decision was individually rational given the environment. The aggregate result was a decade of stagnation with GDP growth averaging 0.5%/yr and deflation despite the ZLB, matching the all-best attractor closely.
Euro-area periphery (2010–2015): Under fiscal austerity conditionality, households in Greece, Portugal, and Spain cut consumption simultaneously, banks tightened credit in response to sovereign risk, and firms reduced investment. Each decision was individually rational given sovereign risk premia. The aggregate result was a 6–26% cumulative GDP contraction, precisely the demand-deficiency mechanism the model isolates.
US balance-sheet recession (2008–2012): Following the housing collapse, US households deleveraged rapidly (individually rational given negative equity), banks contracted credit (individually rational given regulatory pressure and NPL uncertainty), and firms cut investment (individually rational given demand uncertainty). The aggregate result was the deepest post-war US recession, recovered only by large fiscal transfers, consistent with the model’s prediction that the decentralised equilibrium requires external coordination to escape.
Conclusion
Three conclusions emerge from the analysis. First, coordination failure is structural: the all-best economy produces markedly worse aggregate outcomes than the bounded-rational baseline even though every agent type is following individually-optimal rules. Second, the failure mechanism here differs from the companion paper: rather than credit surge and ZLB lock-in, the channel is demand deficiency: conservative household savings and bank credit rationing suppress the consumption and investment flows that sustain firm viability. Third, bounded rationality is a structural stabiliser, not a modelling convenience.
The result establishes that the bounded-rational behaviour documented in heterogeneous-agent macro models is not a modelling simplification but a stabilising feature. Replacing bounded rationality with survival-maximising rules, even without imposing theoretical equilibrium conditions, is sufficient to produce coordination failure. The economy possesses two stable attractor states: the coordinated equilibrium under bounded rationality and the decentralised equilibrium under survival-optimal rules.
Future work should investigate whether an iterative best-response dynamic (each agent type updating its strategy in response to others’ strategies) converges to a stable Nash equilibrium or cycles, and whether the resulting equilibrium is closer to the bounded-rational baseline or to the all-best outcome documented here. See Paper 1 for the companion study on the baseline model, ZLB dynamics, and Minsky dynamics.