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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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References

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  1. Drew Fudenberg & David K. Levine, 2006. "Superstition and Rational Learning," American Economic Review, American Economic Association, vol. 96(3), pages 630-651, June.
  2. Eddie Dekel & Drew Fudenberg & David K. Levine, 2001. "Learning to Play Bayesian Games," Harvard Institute of Economic Research Working Papers 1926, Harvard - Institute of Economic Research.
  3. Drew Fudenberg & David M. Kreps & David K. Levine, 1986. "On the Robustness of Equilibrium Refinements," UCLA Economics Working Papers 398, UCLA Department of Economics.
  4. Drew Fudenberg & David K. Levine, 1996. "Measuring Subject’s Losses in Experimental Games," Levine's Working Paper Archive 370, David K. Levine.
  5. Fudenberg, Drew & Levine, David K, 1993. "Self-Confirming Equilibrium," Econometrica, Econometric Society, vol. 61(3), pages 523-45, May.
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  15. Angeletos, George-Marios & Alesina, Alberto, 2005. "Fairness and Redistribution," Scholarly Articles 4553009, Harvard University Department of Economics.
  16. Benassy, Jean-Pascal, 1975. "Neo-Keynesian Disequilibrium Theory in a Monetary Economy," Review of Economic Studies, Wiley Blackwell, vol. 42(4), pages 503-23, October.
  17. Eddie Dekel & Drew Fudenberg & David K. Levine, . "Payoff Information and Self-Confirming Equilibrium," ELSE working papers 032, ESRC Centre on Economics Learning and Social Evolution.
  18. Ehud Kalai & Alejandro Neme, 1989. "The Strength of a Little Perfection," Discussion Papers 858, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  19. T. Börgers, 2010. "Weak Dominance and Approximate Common Knowledge," Levine's Working Paper Archive 378, David K. Levine.
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Citations

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Cited by:
  1. Gilles Saint-Paul, 2012. "Economic Science and Political Influence," PSE Working Papers halshs-00759057, HAL.
  2. Ellison, Martin & Scott, Andrew, 2013. "Learning and price volatility in duopoly models of resource depletion," Journal of Monetary Economics, Elsevier, vol. 60(7), pages 806-820.
  3. repec:hal:wpaper:halshs-00759057 is not listed on IDEAS
  4. Casey Rothschild & Florian Scheuer, 2012. "Redistributive Taxation in the Roy Model," NBER Working Papers 18228, National Bureau of Economic Research, Inc.
  5. David Levine, 2011. "Neuroeconomics?," International Review of Economics, Springer, vol. 58(3), pages 287-305, September.
  6. 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.

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