Decision-Making in the Presence of Heterogeneous Information and Social Interactions
AbstractThe 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 InfoPaper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 9537.
Length: 46 pages
Date of creation: 1995
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- Binder, Michael & Pesaran, M Hashem, 1998. "Decision Making in the Presence of Heterogeneous Information and Social Interactions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 1027-52, November.
- C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
- D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
- E20 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
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