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Coordination of Expectations: The Eductive Stability Viewpoint

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  • Gabriel Desgranges

    () (Université de Cergy-Pontoise, Cergy-Pontoise 95011, France)

Abstract

The eductive approach consists of finding solutions consistent with common knowledge of individual rationality and the model. An equilibrium is stable whenever it is the unique outcome consistent with these assumptions. This is a strong stability criterion as it relies on no assumption of prior knowledge of others’ expectations. This review presents various (in)stability results. It focuses on the following method: Rewrite the model as a temporary equilibrium map in which the current economic outcome is determined by expectations and characterize stability by contracting properties of this map. The main insight suggested by these results is due to Guesnerie (2002): Stability is obtained when the actual outcome is not very sensitive to expectations. Additional insights include that agents’ heterogeneity is a source of instability; the ability of prices to transmit information is limited by the quality of private information; and coordination when agents are infinitely lived is difficult because of the large effect of long-run expectations.

Suggested Citation

  • Gabriel Desgranges, 2014. "Coordination of Expectations: The Eductive Stability Viewpoint," Annual Review of Economics, Annual Reviews, vol. 6(1), pages 273-298, August.
  • Handle: RePEc:anr:reveco:v:6:y:2014:p:273-298
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    File URL: http://www.annualreviews.org/doi/abs/10.1146/annurev-economics-080213-040944
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    More about this item

    Keywords

    common knowledge; dominance solvability; learning; rational expectations equilibrium; rationalizability;

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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