Problem solving by heterogeneous agents

A substantial amount of economic activity involves problem solving, yet eco nomies has few, if any, formal models to address how agents of limited abil ities Find good solutions to difficult problems. In this paper. we construc t a model ol heterogeneous agents of bounded abilities and analyze their in dividual and collective performance. By heterogeneity, we mean differences in how individuals repre sent 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 s olutions to difficult problems. problem solving firms can exhibit arbitrary marginal returns to problem solvers and that the order that problem solver s are applied to a problem can matter, so that the standard story of decrea sing returns to scale may not apply to problem solving firms. (C) 2001 Acad emic Press.