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A new perspective to rational expectations: maximin rational expectations equilibrium

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  • Marialaura Pesce
  • Peter Cramton
  • Nicholas C. Yannelis

Abstract

We introduce a new notion of rational expectations equilibrium (REE) called maximin rational expectations equilibrium (MREE), which is based on the maximin expected utility (MEU) formulation. In particular, agents maximize maximin expected utility conditioned on their own private information and the information that the equilibrium prices generate. Maximin equilibrium allocations need not to be measurable with respect to the private information of each individual and with respect to the information that the equilibrium prices generate, as it is in the case of the Bayesian REE. We prove that a maximin REE exists universally (and not generically as in Radner (1979) and Allen (1981)), it is effcient and incentive compatible. These results are false for the Bayesian REE

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Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1528.

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Date of creation: 02 Mar 2010
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Handle: RePEc:nwu:cmsems:1528

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References

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  1. Krasa, Stefan & Yannelis, Nicholas C, 1994. "The Value Allocation of an Economy with Differential Information," Econometrica, Econometric Society, vol. 62(4), pages 881-900, July.
  2. Podczeck, Konrad & Yannelis, Nicholas C., 2008. "Equilibrium theory with asymmetric information and with infinitely many commodities," Journal of Economic Theory, Elsevier, vol. 141(1), pages 152-183, July.
  3. Larry G. Epstein & Martin Schneider, 2010. "Ambiguity and Asset Markets," NBER Working Papers 16181, National Bureau of Economic Research, Inc.
  4. Larry Epstein & Martin Schneider, 2002. "Learning Under Ambiguity," RCER Working Papers 497, University of Rochester - Center for Economic Research (RCER), revised Mar 2005.
  5. Scott Condie & Jayant Ganguli, 2011. "Informational efficiency with ambiguous information," Economic Theory, Springer, vol. 48(2), pages 229-242, October.
  6. Koutsougeras, Leonidas C & Yannelis, Nicholas C, 1993. "Incentive Compatibility and Information Superiority of the Core of an Economy with Differential Information," Economic Theory, Springer, vol. 3(2), pages 195-216, April.
  7. Joao Correia-da-Silva & Carlos Hervés-Beloso, 2006. "Prudent Expectations Equilibrium in Economies with Uncertain Delivery," FEP Working Papers 216, Universidade do Porto, Faculdade de Economia do Porto.
  8. Rose-Anne Dana, 2004. "Ambiguity, uncertainty aversion and equilibrium welfare," Economic Theory, Springer, vol. 23(3), pages 569-587, March.
  9. Allen, Beth E, 1981. "Generic Existence of Completely Revealing Equilibria for Economies with Uncertainty when Prices Convey Information," Econometrica, Econometric Society, vol. 49(5), pages 1173-99, September.
  10. Kreps, David M., 1977. "A note on "fulfilled expectations" equilibria," Journal of Economic Theory, Elsevier, vol. 14(1), pages 32-43, February.
  11. Dana, Rose-Anne, 2004. "Ambiguity, uncertainty aversion and equilibrium welfare," Economics Papers from University Paris Dauphine 123456789/5393, Paris Dauphine University.
  12. Dionysius Glycopantis & Allan Muir & Nicholas Yannelis, 2005. "Non-implementation of rational expectations as a perfect Bayesian equilibrium," Economic Theory, Springer, vol. 26(4), pages 765-791, November.
  13. Radner, Roy, 1979. "Rational Expectations Equilibrium: Generic Existence and the Information Revealed by Prices," Econometrica, Econometric Society, vol. 47(3), pages 655-78, May.
  14. Yannelis, Nicholas C, 1991. "The Core of an Economy with Differential Information," Economic Theory, Springer, vol. 1(2), pages 183-97, April.
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Cited by:
  1. John Dickhaut & Radhika Lunawat & Kira Pronin & Jack Stecher, 2011. "Decision making and trade without probabilities," Economic Theory, Springer, vol. 48(2), pages 275-288, October.
  2. Nizar Allouch, 2013. "A competitive equilibrium for a warm-glow economy," Economic Theory, Springer, vol. 53(1), pages 269-282, May.
  3. Jayant Ganguli & Scott Condie, 2012. "The pricing effects of ambiguous private information," Economics Discussion Papers 720, University of Essex, Department of Economics.
  4. Luciano De Castro & Marialaura Pesce & Nicolas Yannelis, 2011. "Core and Equilibria under ambiguity," Discussion Papers 1534, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Scott Condie & Jayant Ganguli, 2011. "Informational efficiency with ambiguous information," Economic Theory, Springer, vol. 48(2), pages 229-242, October.
  6. Nabil I. Al-Najjar & Luciano De Castro, 2010. "Uncertainty, Efficiency and Incentive Compatibility," Discussion Papers 1532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Xiaojuan Hu & Cheng-Zhong Qin, 2013. "Information acquisition and welfare effect in a model of competitive financial markets," Economic Theory, Springer, vol. 54(1), pages 199-210, September.

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