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Formation of rationally heterogeneous expectations

  • Pfajfar, Damjan

This paper models expectation formation by taking into account that agents may produce heterogeneous expectations because of informational frictions and differing levels of a capacity to process information. We show that there are two general classes of steady states within this framework: those where strictly dominated forecasting rules vanish, and those heterogeneous states where a positive proportion of agents uses a more costly perfect foresight. We demonstrate that intrinsic heterogeneity can also arise in a model where the forecasting rules are not equally costly and do not exhibit identical performance in the long run.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 37 (2013)
Issue (Month): 8 ()
Pages: 1434-1452

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Handle: RePEc:eee:dyncon:v:37:y:2013:i:8:p:1434-1452
DOI: 10.1016/j.jedc.2013.03.012
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