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Decision-Making in the Presence of Heterogeneous Information and Social Interactions

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  • Binder,M.
  • Pesaran,M.H.

Abstract

The authors consider the solution of multivariate linear rational expectations models in the presence of heterogeneous information and social interactions. To overcome the 'infinite regress in expectations' problem that arises in the solution of these models, we assume that agents' expectations about the decisions and expectations of other agents are based solely on public information. They show that the resulting solutions satisfy the key postulates of the rational expectations hypothesis, but can nevertheless exhibit dynamic properties quite different from those under homogeneous information. The authors illustrate this by analyzing a model of firms' optimal factor demand decisions. In this model, the presence of information heterogeneity may accentuate the propagation effects of external shocks on firms' factor demands. Copyright 1998 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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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 9537.

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Length: 46 pages
Date of creation: 1995
Date of revision:
Handle: RePEc:cam:camdae:9537

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Web page: http://www.econ.cam.ac.uk/index.htm

Related research

Keywords: EXPECTATIONS; MODELS;

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Cited by:
  1. Michael R. Wickens & Roberto Motto, 2001. "Estimating shocks and impulse response functions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 371-387.
  2. Adam, Klaus, 2003. "Optimal monetary policy with imperfect common knowledge," Working Paper Series 0223, European Central Bank.
  3. Pesaran, M.H. & Weale, M., 2005. "Survey Expectations," Cambridge Working Papers in Economics 0536, Faculty of Economics, University of Cambridge.
  4. Kenneth Kasa, 1995. "Signal extraction and the propagation of business cycles," Working Papers in Applied Economic Theory 95-14, Federal Reserve Bank of San Francisco.
  5. Ioannides, Yannis M. & Soetevent, Adriaan R., 2007. "Social networking and individual outcomes beyond the mean field case," Journal of Economic Behavior & Organization, Elsevier, vol. 64(3-4), pages 369-390.
  6. Binder, Michael & Pesaran, M. Hashem, 2001. "Life-cycle consumption under social interactions," Journal of Economic Dynamics and Control, Elsevier, vol. 25(1-2), pages 35-83, January.

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