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Learning from the Expectations of Others

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Author Info

  • Granato, J.
  • Guse, E.
  • Sunny Wong, M.C.

Abstract

The assumption of perfectly rational representative agents is commonly questioned. This paper explores the equilibrium properties of boundedly rational heterogeneous agents. We combine an adaptive learning process in a modified cobweb model within a Stackleberg framework. We assume that there is an asymmetric information diffusion process from leading to following firms. In contrast to a simple cobweb model which has a unique REE, our model may produce multiple restricted perceptions equilibria (RPE). However, a unique and learnable RPE, under certain conditions, can exist in our model. In addition, the following firms’ forecasts can confound the leading firms’ forecasts - when the following firms misinterpret information coming from the leading firms. We refer this situation to the boomerang effect. We also find that the leading firms’ mean squared forecast error can be even larger than that of following firms if the proportion of following firms is sufficiently large in the market.

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Bibliographic Info

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0605.

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Length: 21
Date of creation: Feb 2006
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Handle: RePEc:cam:camdae:0605

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Related research

Keywords: Adaptive Learning; Expectational Stability; Information Diffusion; Cobweb Model; Heterogeneous Expectations;

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References

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  2. Guse, E., 2005. "Learning in a Misspecified Multivariate Self-referential Linear Stochastic Model," Cambridge Working Papers in Economics 0548, Faculty of Economics, University of Cambridge.
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Cited by:
  1. Ichiro Muto, 2008. "Monetary Policy and Learning from the Central Bank's Forecast," IMES Discussion Paper Series 08-E-01, Institute for Monetary and Economic Studies, Bank of Japan.

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