Stabilizing through Poor Information
AbstractThis paper studies the effect of asymmetric information on equilibrium stability in a class of linear models where the actual state depends on the forecasts about it. Stability is deffined by the so-called eductive criterion which relies on common knowledge of rationality. The main result is that stability obtains when the proportion of uninformed agents is high enough. The expectational behavior of these agents indeed displays more inertia. This behavior, and then the actual outcome, are therefore easier to predict. This result is linked to the issue of informational efficiency. Extensions to cases with higher order uncertainty, additional agents heterogeneity, and sunspots are also considered.
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Bibliographic InfoPaper provided by THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise in its series THEMA Working Papers with number 2008-32.
Date of creation: 2008
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Asymmetric information; eductive stability; rational expecta- tions; stabilization.;
Find related papers by JEL classification:
- C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
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