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Rational Expectations in Urban Economics

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  • Berliant, Marcus
  • Yu, Chia-Ming

Abstract

Canonical analysis of the classical general equilibrium model demonstrates the existence of an open and dense subset of standard economies that possess fully-revealing rational expectations equilibria. This paper shows that the analogous result is not true in urban economies under appropriate modifications for this field. An open subset of economies where none of the modified rational expectations equilibria fully reveals private information is found. There are two important pieces. First, there can be information about a location known by a consumer who does not live in that location in equilibrium, and thus the equilibrium rent does not reflect this information. Second, if a consumer's utility depends only on information about their (endogenous) location of residence, perturbations of utility naturally do not incorporate information about other locations conditional on the consumer's location of residence. Existence of equilibrium is proved. Space can prevent housing prices from transmitting information from informed to uninformed households, resulting in an inefficient outcome.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 41356.

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Date of creation: 15 Sep 2012
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Handle: RePEc:pra:mprapa:41356

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Keywords: Urban Economics; General Equilibrium; Private Information; Rational Expectations;

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Cited by:
  1. Berliant, Marcus & Yu, Chia-Ming, 2009. "Locational signaling and agglomeration," MPRA Paper 19462, University Library of Munich, Germany.

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