Learning from the Expectations of Others
AbstractThe 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 InfoPaper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0605.
Date of creation: Feb 2006
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Adaptive Learning; Expectational Stability; Information Diffusion; Cobweb Model; Heterogeneous Expectations;
Other versions of this item:
- C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-02-19 (All new papers)
- NEP-EVO-2006-02-19 (Evolutionary Economics)
- NEP-FMK-2006-02-19 (Financial Markets)
- NEP-MAC-2006-02-19 (Macroeconomics)
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