Journal article
A new approach to the rational expectations equilibrium: existence, optimality and incentive compatibility
Annals of finance, Vol.16(1), pp.1-61
03/01/2020
DOI: 10.1007/s10436-019-00349-w
Abstract
Rational expectations equilibrium seeks a proper treatment of behavior under private information by assuming that the information revealed by prices is taken into account by consumers in their decisions. Typically agents are supposed to maximize a conditional expectation of state-dependent utility function and to consume the same bundles in indistiguishable states [see Allen (Econometrica 49(5):1173-1199, 1981), Radner (Econometrica 47(3):655-678, 1979)]. A problem with this model is that a rational expectations equilibrium may not exist even under very restrictive assumptions, may not be efficient, may not be incentive compatible, and may not be implementable as a perfect Bayesian equilibrium (Glycopantis et al. in Econ Theory 26(4):765-791, 2005). We introduce a notion of rational expectations equilibrium with two main features: agents may consume different bundles in indistinguishable states and ambiguity is allowed in individuals' preferences. We show that such an equilibrium exists universally and not only generically without freezing a particular preferences representation. Moreover, if we particularize the preferences to a specific form of the maxmin expected utility model introduced in Gilboa and Schmeidler (J Math Econ 18(2):141-153, 1989), then we are able to prove efficiency and incentive compatibility. These properties do not hold for the traditional (Bayesian) Rational Expectation Equilibrium.
Details
- Title: Subtitle
- A new approach to the rational expectations equilibrium: existence, optimality and incentive compatibility
- Creators
- Luciano I. de Castro - University of IowaMarialaura Pesce - University of Naples Federico IINicholas C. Yannelis - University of Iowa
- Resource Type
- Journal article
- Publication Details
- Annals of finance, Vol.16(1), pp.1-61
- Publisher
- Springer Nature
- DOI
- 10.1007/s10436-019-00349-w
- ISSN
- 1614-2446
- eISSN
- 1614-2454
- Number of pages
- 61
- Language
- English
- Date published
- 03/01/2020
- Academic Unit
- Economics
- Record Identifier
- 9984380519702771
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