1 Introduction
One of the most pervasive presumptions in modern economic analysis is the
symmetric nature of interacting agents. While often intended solely as a sim-
plifying assumption on a priori grounds, this presumption has also permeated
economic thinking for a variety of other reasons. When considering noncooper-
ative games, analysts often restrict attention to symmetric equilibrium points
even when other asymmetric outcomes exist and may reflect more rational-
izable or more pertinent behavior. In mechanism design or policy games, the
social planner typically assumes identical treatment of identical agents, although
global optimality might dictate otherwise. The design of various forms of joint
ventures is also subject to a similar observation.
In most cases, the only justification beyond simplicity is what Schelling
(1960) convincingly termed the focal nature of symmetric equilibrium outcomes.
Indeed, it is widely recognized that inter-agent heterogeneity is often a critical
dimension of several economic and social phenomena. From a positive perspec-
tive, heterogeneity is simply a necessary postulate to account for the simple fact
that in the real world, one seldom observes identical agents, be it individuals,
firms, industries or countries. In a similar vein, even from a normative stand-
point, differences across interacting agents often constitute a necessary condition
for many important economic activities such as trade or risk-sharing.
Understanding the origins and/or evolution of diversity across economic
agents or disparities in economic performance across regions is increasingly per-
ceived as a central goal of economic and social research in a number of different
areas (see e.g. Geroski et al. (2003) and Ghemawat (1986) ). Macroeconomists
attempt to explain the causes of booms and recessions. Development economists
wish to understand the forces behind poor and strong economic performances.
Labor economists attempt to get a handle on discriminatory treatment of some
groups of workers. Business strategists and industrial economists devote a lot
of attention to the sources and sustainability of inter-firm heterogeneity within
and across industries. Overall, much effort has been expanded with a view to