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Dropping Rational Expectations

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  • Lionel De Boisdeffre

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, CATT - Centre d'Analyse Théorique et de Traitement des données économiques - UPPA - Université de Pau et des Pays de l'Adour)

Abstract

We consider a pure exchange economy, where agents, typically asymmetrically informed, exchange securities, on financial markets, and commodities, on spot markets. Consumers have private characteristics, anticipations and beliefs, and no model to forecast prices. Rational expectation and bounded rationality assumptions are dropped. We show that agents face an incompressible uncertainty, represented by a so-calles "minimum uncertainty set". This uncertainty typically adds to the exogenous one, on the state of nature, an ‘endogenous uncertainty' over future spot prices. At equilibrium, all agents expect the ‘true' price on every spot market as a possible outcome, and elect optimal strategies, ex ante, which clear on all markets ex post. We show this sequential equilibrium exists whenever agents' prior anticipations embed the minimum uncertainty set. This outcome differs from the standard generic existence results of Hart (1975), Radner (1979), or Duffie-Shaffer (1985), among others based on the rational expectations of prices.

Suggested Citation

  • Lionel De Boisdeffre, 2018. "Dropping Rational Expectations," Post-Print halshs-01903510, HAL.
    • Handle: RePEc:hal:journl:halshs-01903510
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-01903510
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    References listed on IDEAS

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    1. Bernard Cornet & Lionel Boisdeffre, 2009. "Elimination of arbitrage states in asymmetric information models," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 38(2), pages 287-293, February.
    2. Bernard Cornet & Lionel Boisdeffre, 2009. "Elimination of arbitrage states in asymmetric information models," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 38(2), pages 287-293, February.
    3. Ho-Mou Wu & Mordecai Kurz, 1996. "Endogenous uncertainty in a general equilibrium model with price contingent contracts (*)," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 8(3), pages 461-488.
    4. Radner, Roy, 1979. "Rational Expectations Equilibrium: Generic Existence and the Information Revealed by Prices," Econometrica, Econometric Society, vol. 47(3), pages 655-678, May.
    5. KOUTSOUGERAS, Leonidas C. & YANNELIS, Nicholas C., 1999. "Bounded rational learning in differential information economies: core and value," LIDAM Reprints CORE 1429, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    6. Hart, Oliver D., 1975. "On the optimality of equilibrium when the market structure is incomplete," Journal of Economic Theory, Elsevier, vol. 11(3), pages 418-443, December.
    7. Kurz, Mordecai, 1994. "On Rational Belief Equilibria," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(6), pages 859-876, October.
    8. Duffie, Darrell & Shafer, Wayne, 1985. "Equilibrium in incomplete markets: I : A basic model of generic existence," Journal of Mathematical Economics, Elsevier, vol. 14(3), pages 285-300, June.
    9. Radner, Roy, 1972. "Existence of Equilibrium of Plans, Prices, and Price Expectations in a Sequence of Markets," Econometrica, Econometric Society, vol. 40(2), pages 289-303, March.
    10. Kurz, Mordecai, 1994. "On the Structure and Diversity of Rational Beliefs," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(6), pages 877-900, October.
    11. Cornet, Bernard & De Boisdeffre, Lionel, 2002. "Arbitrage and price revelation with asymmetric information and incomplete markets," Journal of Mathematical Economics, Elsevier, vol. 38(4), pages 393-410, December.
    12. Koutsougeras, Leonidas & Yannelis, Nicholas C., 1999. "Bounded rational learning in differential information economies: core and value," Journal of Mathematical Economics, Elsevier, vol. 31(3), pages 373-391, April.
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