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Self-confirming equilibrium and the Lucas critique

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  • Fudenberg, Drew
  • Levine, David K.

Abstract

We examine the role of off-path "superstitions" in macro-economics, and show how a false belief about off-path play is the key element underlying both the Lucas Critique and the game-theoretic concept of self-confirming equilibrium. However, the impact of false beliefs in these two cases is different: In the Lucas case, a policy maker's incorrect beliefs about off-path play can lead to the adoption of mistaken policy innovation. However, the consequences of such an innovation provide evidence that the belief that motivated them was wrong. In contrast, play may never escape an undesirable self-confirming equilibrium, as the action implied by the mistaken belief does not generate data that contradicts it; escape from the self-confirming equilibrium requires that players do a sufficient amount of experimentation with off-path actions.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 144 (2009)
Issue (Month): 6 (November)
Pages: 2354-2371

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Handle: RePEc:eee:jetheo:v:144:y:2009:i:6:p:2354-2371

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Web page: http://www.elsevier.com/locate/inca/622869

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Keywords: Lucas Critique Self-confirming equilibrium Superstitions;

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  1. Eddie Dekel & Drew Fudenberg & David K. Levine, 2000. "Learning to Play Bayesian Games," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1322, Northwestern University, Center for Mathematical Studies in Economics and Management Science, revised Jul 2001.
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  3. Drew Fudenberg & David M. Kreps & David K. Levine, 1986. "On the Robustness of Equilibrium Refinements," UCLA Economics Working Papers, UCLA Department of Economics 398, UCLA Department of Economics.
  4. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 1(1), pages 19-46, January.
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Cited by:
  1. Casey Rothschild & Florian Scheuer, 2012. "Redistributive Taxation in the Roy Model," NBER Working Papers 18228, National Bureau of Economic Research, Inc.
  2. Gilles Saint-Paul, 2012. "Economic Science and Political Influence," PSE Working Papers halshs-00759057, HAL.
  3. Ohanian, Lee E. & Prescott, Edward C. & Stokey, Nancy L., 2009. "Introduction to dynamic general equilibrium," Journal of Economic Theory, Elsevier, Elsevier, vol. 144(6), pages 2235-2246, November.
  4. Ellison, Martin & Scott, Andrew, 2009. "Learning and Price Volatility in Duopoly Models of Resource Depletion," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7378, C.E.P.R. Discussion Papers.
  5. David Levine, 2011. "Neuroeconomics?," International Review of Economics, Springer, Springer, vol. 58(3), pages 287-305, September.
  6. repec:hal:wpaper:halshs-00759057 is not listed on IDEAS

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