Problem Solving by Heterogeneous Agents

A substantial amount of economic activity involves problem solving, yet economics has few, if any, formal models to address how agents of limited abilities find good solutions to difficult problems. In this paper, we construct a model of heterogeneous agents of bounded abilities and analyze their individual and collective performance. By heterogeneity, we mean differences in how individuals represent problems internally, their perspectives, and in the algorithms they use to generate solutions, their heuristics. We find that while a collection of bounded but diverse agents can locate optimal solutions to difficult problems, problem solving firms can exhibit arbitrary marginal returns to problem solvers and that the order that problem solvers are applied to a problem can matter, so that the standard story of decreasing returns to scale may not apply to problem solving firms. Journal of Economic Literature Classification Numbers: C6, D2.

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