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Self Confirming Equilibrium and the Lucas Critique

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  • Drew Fudenberg
  • David K Levine

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

Paper provided by David K. Levine in its series Levine's Working Paper Archive with number 843644000000000022.

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Date of creation: 05 Apr 2007
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Handle: RePEc:cla:levarc:843644000000000022

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  1. Fudenberg, Drew & Levine, David K, 1993. "Steady State Learning and Nash Equilibrium," Econometrica, Econometric Society, Econometric Society, vol. 61(3), pages 547-73, May.
  2. Eddie Dekel & Drew Fudenberg & David K Levine, 2002. "Learning to Play Bayesian Games," Levine's Working Paper Archive 625018000000000151, David K. Levine.
  3. Alberto Alesina & George-Marios Angeletos, 2004. "Fairness and Redistribution," NajEcon Working Paper Reviews 122247000000000306, www.najecon.org.
  4. Benassy Jean-pascal, 1974. "Neokeynesian disequilibrium theory in a monetary economy," CEPREMAP Working Papers (Couverture Orange) 7402, CEPREMAP.
  5. Levine, David & Kreps, David & Fudenberg, Drew, 1988. "On the Robustness of Equilibrium Refinements," Scholarly Articles 3350444, Harvard University Department of Economics.
  6. William Poole, 2002. "Flation," Speech, Federal Reserve Bank of St. Louis 49, Federal Reserve Bank of St. Louis.
  7. Dekel, Eddie & Fudenberg, Drew & Levine, David K., 1999. "Payoff Information and Self-Confirming Equilibrium," Journal of Economic Theory, Elsevier, vol. 89(2), pages 165-185, December.
  8. Drew Fudenberg & David K. Levine, 2006. "Superstition and Rational Learning," American Economic Review, American Economic Association, vol. 96(3), pages 630-651, June.
  9. E. Dekel & D. Fudenberg, 2010. "Rational Behavior with Payoff Uncertainty," Levine's Working Paper Archive 379, David K. Levine.
  10. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 473-91, June.
  11. In-Koo Cho & Noah Williams & Thomas J. Sargent, 2002. "Escaping Nash Inflation," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 1-40.
  12. Ehud Kalai & Alejandro Neme, 1989. "The Strength of a Little Perfection," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 858, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  13. Kalai, Ehud & Lehrer, Ehud, 1991. "Rational Learning Leads to Nash Equilibrium," Working Papers, C.V. Starr Center for Applied Economics, New York University 91-18, C.V. Starr Center for Applied Economics, New York University.
  14. Fudenberg, D. & Levine, D.K., 1991. "Self-Confirming Equilibrium ," Working papers 581, Massachusetts Institute of Technology (MIT), Department of Economics.
  15. Borgers Tilman, 1994. "Weak Dominance and Approximate Common Knowledge," Journal of Economic Theory, Elsevier, vol. 64(1), pages 265-276, October.
  16. Noldeke Georg & Samuelson Larry, 1993. "An Evolutionary Analysis of Backward and Forward Induction," Games and Economic Behavior, Elsevier, vol. 5(3), pages 425-454, July.
  17. Monderer, Dov & Samet, Dov, 1989. "Approximating common knowledge with common beliefs," Games and Economic Behavior, Elsevier, vol. 1(2), pages 170-190, June.
  18. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 1(1), pages 19-46, January.
  19. Thomas Sargent & Noah Williams & Tao Zha, 2004. "Shocks and government beliefs: the rise and fall of American inflation," Working Paper, Federal Reserve Bank of Atlanta 2004-22, Federal Reserve Bank of Atlanta.
  20. Fudenberg, Drew & Kreps, David M., 1995. "Learning in extensive-form games I. Self-confirming equilibria," Games and Economic Behavior, Elsevier, vol. 8(1), pages 20-55.
  21. Hahn, Frank H, 1977. " Exercises in Conjectural Equilibria," Scandinavian Journal of Economics, Wiley Blackwell, vol. 79(2), pages 210-26.
  22. Drew Fudenberg & David K. Levine, 1996. "Measuring Subject’s Losses in Experimental Games," Levine's Working Paper Archive 370, David K. Levine.
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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, 2009. "Learning and Price Volatility in Duopoly Models of Resource Depletion," CEPR Discussion Papers 7378, C.E.P.R. Discussion Papers.
  3. Casey Rothschild & Florian Scheuer, 2012. "Redistributive Taxation in the Roy Model," NBER Working Papers 18228, National Bureau of Economic Research, Inc.
  4. repec:hal:wpaper:halshs-00759057 is not listed on IDEAS
  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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