The Effect of Level of Rationality on Macro-Activities of the Lucas-Island Model

AbstractThis paper investigates the effect of different levels of rationality on the Lucas-Islands model of economic behaviour. In particular, this is studied through the use of Agentbased Computational Economics, where individual economic agents are represented by separate computational entities in an interacting computer simulation. Three different economic models are studied: one where workers are assigned randomly to firms, the second where there is loyalty to firms from workers, and the third where workers have a broader set of criteria on which to make a job choice. Simulations show that there are positive relationships between level of rationality and several factors in the model, i.e. wage, vacancy rate and production, whilst unemployment level is negatively correlated with level of rationality.