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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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  • Fudenberg, Drew & Levine, David K., 2009. "Self-confirming equilibrium and the Lucas critique," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2354-2371, November.
    • Handle: RePEc:eee:jetheo:v:144:y:2009:i:6:p:2354-2371
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    3. Lars P. Hansen & Thomas J. Sargent, 2016. "Sets of Models and Prices of Uncertainty," NBER Working Papers 22000, National Bureau of Economic Research, Inc.
    4. Norman, Thomas W.L., 2015. "Learning, hypothesis testing, and rational-expectations equilibrium," Games and Economic Behavior, Elsevier, vol. 90(C), pages 93-105.
    5. Invernizzi, Giovanna M. & Miller, Joshua B. & Coen, Tommaso & Dufwenberg, Martin & Oliveira, Luiz Edgard R., 2021. "Tra i Leoni: Revealing the preferences behind a superstition," Journal of Economic Psychology, Elsevier, vol. 82(C).
    6. Pierpaolo Battigalli & Simone Cerreia-Vioglio & Fabio Maccheroni & Massimo Marinacci & Thomas Sargent, 2016. "A Framework for the Analysis of Self-Confirming Policies," Working Papers 573, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    7. Casey Rothschild & Florian Scheuer, 2013. "Redistributive Taxation in the Roy Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 128(2), pages 623-668.
    8. Florian Scheuer & Casey Rothschild, 2011. "Rent Seeking and Optimal Taxation," 2011 Meeting Papers 1262, Society for Economic Dynamics.
    9. Ohanian, Lee E. & Prescott, Edward C. & Stokey, Nancy L., 2009. "Introduction to dynamic general equilibrium," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2235-2246, November.
    10. David K Levine, 2009. "Is Behavioral Economics Doomed?," Levine's Working Paper Archive 814577000000000274, David K. Levine.
    11. Hansen, Lars Peter & Sargent, Thomas J., 2021. "Macroeconomic uncertainty prices when beliefs are tenuous," Journal of Econometrics, Elsevier, vol. 223(1), pages 222-250.
    12. Gershman, Boris, 2015. "The economic origins of the evil eye belief," Journal of Economic Behavior & Organization, Elsevier, vol. 110(C), pages 119-144.
    13. David Levine, 2011. "Neuroeconomics?," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 58(3), pages 287-305, September.
    14. Elvio Accinelli & Edgar J. Sanchez Carrera, 2012. "The Evolutionary Game Of Poverty Traps," Manchester School, University of Manchester, vol. 80(4), pages 381-400, July.
    15. Xiao Luo & Xuewen Qian & Yang Sun, 2021. "The algebraic geometry of perfect and sequential equilibrium: an extension," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 71(2), pages 579-601, March.
    16. Manvir Singh & Pascal Boyer & Leeson, Peter T & Mckay Ryan & Bentall, Richard P & Sarah Peacey & Ruth Mace & Schimmelpfennig, Robin & Muthukrishna, Michael, 2021. "Magic, explanations, and evil: the origins and design of witches and sorcerers," Post-Print hal-03256601, HAL.
    17. Drew Fudenberg & David K Levine, 2016. "Whither Game Theory?," Levine's Working Paper Archive 786969000000001307, David K. Levine.

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