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Decision-Making in the Presence of Heterogeneous Information and Social Interactions

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  • Binder,M.
  • Pesaran,M.H.

Abstract

The authors consider the solution of multivariate linear rational expectations models in the presence of heterogeneous information and social interactions. To overcome the 'infinite regress in expectations' problem that arises in the solution of these models, we assume that agents' expectations about the decisions and expectations of other agents are based solely on public information. They show that the resulting solutions satisfy the key postulates of the rational expectations hypothesis, but can nevertheless exhibit dynamic properties quite different from those under homogeneous information. The authors illustrate this by analyzing a model of firms' optimal factor demand decisions. In this model, the presence of information heterogeneity may accentuate the propagation effects of external shocks on firms' factor demands. Copyright 1998 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
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Suggested Citation

  • Binder,M. & Pesaran,M.H., 1995. "Decision-Making in the Presence of Heterogeneous Information and Social Interactions," Cambridge Working Papers in Economics 9537, Faculty of Economics, University of Cambridge.
  • Handle: RePEc:cam:camdae:9537
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    Cited by:

    1. Pesaran, M. Hashem & Weale, Martin, 2006. "Survey Expectations," Handbook of Economic Forecasting, Elsevier.
    2. Michael R. Wickens & Roberto Motto, 2001. "Estimating shocks and impulse response functions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 371-387.
    3. Adam, Klaus, 2007. "Optimal monetary policy with imperfect common knowledge," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 267-301, March.
    4. Ioannides, Yannis M. & Soetevent, Adriaan R., 2007. "Social networking and individual outcomes beyond the mean field case," Journal of Economic Behavior & Organization, Elsevier, vol. 64(3-4), pages 369-390.
    5. Backé, Peter, 2003. "Optimal monetary policy with imperfect common knowledge," Working Paper Series 223, European Central Bank.
    6. Kenneth Kasa, 2000. "Forecasting the Forecasts of Others in the Frequency Domain," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(4), pages 726-756, October.
    7. Binder, Michael & Pesaran, M. Hashem, 2001. "Life-cycle consumption under social interactions," Journal of Economic Dynamics and Control, Elsevier, vol. 25(1-2), pages 35-83, January.

    More about this item

    Keywords

    EXPECTATIONS; MODELS;

    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)

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