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Rationalizable Expectations

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  • Elchanan Ben-Porath

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  • Aviad Heifetz

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    Abstract

    Consider an exchange economy with asymmetric information. What is the set of outcomes that are consistent with common knowledge of rationality and market clearing? We propose the concept of CKRMC as an answer to this question. The set of price functions that are CKRMC is the maximal set F with the property that every f?F defi?nes prices that clear the markets for demands that can be rationalized by some profile of subjective beliefs on F. Thus, the difference between CKRMC and Rational Expectations Equilibrium (REE) is that CKRMC allows for a situation where the agents do not know the true price function and furthermore may have different beliefs about it. We characterize CKRMC, study its properties, and apply it to a general class of economies with two commodities. CKRMC manifests intuitive properties that stand in contrast to the full revelation property of REE. In particular, we obtain that for a broad class of economies: (1) There is a whole range of prices that are CKRMC in every state. (2) The set of CKRMC outcomes is monotonic with the amount of information in the economy.

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    File URL: http://ratio.huji.ac.il/sites/default/files/publications/dp461.pdf
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    Bibliographic Info

    Paper provided by The Center for the Study of Rationality, Hebrew University, Jerusalem in its series Discussion Paper Series with number dp461.

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    Length: 40 pages
    Date of creation: Nov 2006
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    Handle: RePEc:huj:dispap:dp461

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    1. Guesnerie, R., 1999. "Anchoring Economic Predictions in Common Knowledge," DELTA Working Papers 1999-06, DELTA (Ecole normale supérieure).
    2. DUTTA, Jayasri & MORRIS, Stephen, 1995. "The Revelation of Information and Self-Fulfilling Beliefs," CORE Discussion Papers 1995076, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    3. Stephen Morris, . "Justifying Rational Expectations," Penn CARESS Working Papers 9c26245814018c6e9fadb3767, Penn Economics Department.
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    Cited by:
    1. Elchanan Ben-Porath, 2007. "Trade with Heterogeneous Beliefs," Levine's Bibliography 122247000000001494, UCLA Department of Economics.
    2. Elchanan Ben-Porath, 2007. "Trade with Heterogeneous Beliefs," Discussion Paper Series dp462, The Center for the Study of Rationality, Hebrew University, Jerusalem.

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