Heterogeneous Expectations, Volatility and Welfare
This paper explores the extent to which the lack of rationality of economic agents has affected the economic fluctuations of the U.S. hog market. The dynamic model of this paper adopts the framework of conventional rational expectations models and nests heterogeneity in expectations in the framework. In particular, the model assumes two types of economic agents. One (rational agent) has rational expectations and the other (boundedly rational agent) has static expectations. A log-likelihood function is constructed based on the model and the fraction of boundedly rational agents is estimated by the function. Subsequently, simulation experiments are performed to investigate the extent to which the presence of boundedly rational economic agents has affected the volatility of the economic variables of the market. In particular, two sets of artificial data are generated by the model, one set with the estimated fraction of boundedly rational agents and the other with their zero fraction. Next, the standard deviations of the quantity and price variables are computed using the simulated data and then compared. The welfare quantified as consumer surplus minus production costs is measured and compared in the same way. Empirical test results indicate that the presence of boundedly rational economic agents has increased the price and quantity volatility by 14 and 25 percent respectively, in the U.S. hog market for the period from 1945 to 1990. However, welfare turns out to be rarely affected by their presence as far as rational economic agents dominate the market.
|Date of creation:||Jun 2000|
|Date of revision:|
|Contact details of provider:|| Postal: 777 Kokusai-cho, Minami Uonuma0-shi, Niigata 949-7277 JAPAN|
Web page: http://www.iuj.ac.jp/research/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- John Conlisk, 1996. "Why Bounded Rationality?," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 669-700, June.
- McGrattan, Ellen R., 1994. "A note on computing competitive equilibria in linear models," Journal of Economic Dynamics and Control, Elsevier, vol. 18(1), pages 149-160, January.
- Andrews, Donald W K, 1996. "Admissibility of the Likelihood Ratio Test When the Parameter Space Is Restricted under the Alternative," Econometrica, Econometric Society, vol. 64(3), pages 705-18, May.
- Hayes, Dermot J. & Schmitz, Andrew, 1987.
"Hog Cycles and Countercyclical Production Response,"
Staff General Research Papers
597, Iowa State University, Department of Economics.
- Dermot J. Hayes & Andrew Schmitz, 1987. "Hog Cycles and Countercyclical Production Response," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 69(4), pages 762-770.
- De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990.
"Noise Trader Risk in Financial Markets,"
3725552, Harvard University Department of Economics.
- Lucas, Robert E, Jr & Prescott, Edward C, 1971. "Investment Under Uncertainty," Econometrica, Econometric Society, vol. 39(5), pages 659-81, September.
- Jean-Michel Grandmont, 1998.
"Expectations Formation and Stability of Large Socioeconomic Systems,"
Econometric Society, vol. 66(4), pages 741-782, July.
- Grandmont, Jean-Michel, 1994. "Expectations formation and stability of large socioeconomic systems," CEPREMAP Working Papers (Couverture Orange) 9424, CEPREMAP.
- GRANDMONT, Jean-Michel, 1997. "Expectations formation and stability of large socioeconomic systems," CORE Discussion Papers 1997088, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Jean-Michel Grandmont, 1997. "Expectations Formation and Stability of Large Socioeconomic Systems," Working Papers 97-27, Centre de Recherche en Economie et Statistique.
- Jarvis, Lovell S, 1974. "Cattle as Capital Goods and Ranchers as Portfolio Managers: An Application to the Argentine Cattle Sector," Journal of Political Economy, University of Chicago Press, vol. 82(3), pages 489-520, May/June.
- Rosen, S. & Murphy, K.M. & Scheinkman, J.A., 1993.
University of Chicago - Economics Research Center
93-2, Chicago - Economics Research Center.
- Kenneth D. West, 1993. "Inventory Models," NBER Technical Working Papers 0143, National Bureau of Economic Research, Inc.
- Lars Peter Hansen & Ellen R. McGrattan & Thomas J. Sargent, 1994.
"Mechanics of forming and estimating dynamic linear economies,"
182, Federal Reserve Bank of Minneapolis.
- Anderson, Evan W. & McGrattan, Ellen R. & Hansen, Lars Peter & Sargent, Thomas J., 1996. "Mechanics of forming and estimating dynamic linear economies," Handbook of Computational Economics, in: H. M. Amman & D. A. Kendrick & J. Rust (ed.), Handbook of Computational Economics, edition 1, volume 1, chapter 4, pages 171-252 Elsevier.
- Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
- Bray, Margaret, 1982. "Learning, estimation, and the stability of rational expectations," Journal of Economic Theory, Elsevier, vol. 26(2), pages 318-339, April.
- Hommes, Cars & Sorger, Gerhard, 1998. "Consistent Expectations Equilibria," Macroeconomic Dynamics, Cambridge University Press, vol. 2(03), pages 287-321, September.
- Baak, Saang Joon, 1999. "Tests for bounded rationality with a linear dynamic model distorted by heterogeneous expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 23(9-10), pages 1517-1543, September.
- J. Barkley Rosser, 1999. "On the Complexities of Complex Economic Dynamics," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 169-192, Fall.
- Becker, Robert A., 1985. "Capital income taxation and perfect foresight," Journal of Public Economics, Elsevier, vol. 26(2), pages 147-167, March.
- Dechert, Dee, 1978. "Optimal control problems from second-order difference equations," Journal of Economic Theory, Elsevier, vol. 19(1), pages 50-63, October.
When requesting a correction, please mention this item's handle: RePEc:iuj:wpaper:ems_2000_01. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kazumi Imai, Office of Academic Affairs)
If references are entirely missing, you can add them using this form.