SMALL DEVIATIONS FROM MAXIMIZING BEHAVIOR IN A SIMPLE DYNAMIC-MODEL

The motivating intuition is that the presence of nonmaximizing agents induces maximizing agents to take advantage of them, and that this mig ht magnify the effect of small deviations from maximizing behavior. Th is intuition is explored using a simple dynamic model. With an inflexi ble entry process, small deviations from maximizing behavior may have a substantial impact on the allocation of gains from trade. With a fle xible entry process, the effect is dampened by adjustments in entry. Y et these deviations result in a first-order efficiency loss, in contra st to the second-order loss that one would expect from looking at stan dard static models.