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A new perspective to rational expectations: maximin rational expectations equilibrium

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  • Luciano De Castro
  • Marialaura Pesce
  • Nicholas C. Yannelis

Abstract

We introduce a new notion of rational expectations equilibrium (REE) called maximin rational expectations equilibrium (MREE), which is based on the maximin expected utility (MEU) formulation. In particular, agents maximize maximin expected utility conditioned on their own private information and the information that the equilibrium prices generate. Maximin equilibrium allocations need not to be measurable with respect to the private information of each individual and with respect to the information that the equilibrium prices generate, as it is in the case of the Bayesian REE. We prove that a maximin REE exists universally (and not generically as in Radner (1979) and Allen (1981)), it is effcient and incentive compatible. These results are false for the Bayesian REE
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  • Luciano De Castro & Marialaura Pesce & Nicholas C. Yannelis, 2011. "A new perspective to rational expectations: maximin rational expectations equilibrium," Economics Discussion Paper Series 1107, Economics, The University of Manchester.
    • Handle: RePEc:man:sespap:1107
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    References listed on IDEAS

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    1. Larry G. Epstein & Martin Schneider, 2010. "Ambiguity and Asset Markets," Annual Review of Financial Economics, Annual Reviews, vol. 2(1), pages 315-346, December.
    2. repec:dau:papers:123456789/5393 is not listed on IDEAS
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    10. Stefan Krasa & Nicholas C. Yannelis, 2005. "The value allocation of an economy with differential information," Studies in Economic Theory, in: Dionysius Glycopantis & Nicholas C. Yannelis (ed.), Differential Information Economies, pages 507-526, Springer.
    11. Dionysius Glycopantis & Nicholas C. Yannelis (ed.), 2005. "Differential Information Economies," Studies in Economic Theory, Springer, number 978-3-540-26979-3, March.
    12. Scott Condie & Jayant Ganguli, 2011. "Informational efficiency with ambiguous information," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 48(2), pages 229-242, October.
    13. Dionysius Glycopantis & Allan Muir & Nicholas Yannelis, 2005. "Non-implementation of rational expectations as a perfect Bayesian equilibrium," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 26(4), pages 765-791, November.
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    Cited by:

    1. Angelos Angelopoulos, 2014. "Maximin Value Allocation with a Non-Finite Set of States," Economics Discussion Paper Series 1406, Economics, The University of Manchester.
    2. Nizar Allouch, 2013. "A competitive equilibrium for a warm-glow economy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 53(1), pages 269-282, May.
    3. Jeleva, Meglena & Tallon, Jean-Marc, 2016. "Ambiguïté, comportements et marchés financiers," L'Actualité Economique, Société Canadienne de Science Economique, vol. 92(1-2), pages 351-383, Mars-Juin.
    4. Condie, Scott & Ganguli, Jayant, 2017. "The pricing effects of ambiguous private information," Journal of Economic Theory, Elsevier, vol. 172(C), pages 512-557.
    5. Angelos Angelopoulos, 2014. "Maximin Value Allocation with a Continuum of States," Economics Discussion Paper Series 1407, Economics, The University of Manchester.
    6. repec:esx:essedp:720 is not listed on IDEAS
    7. Angelos Angelopoulos & Leonidas Koutsougeras, 2015. "Value allocation under ambiguity," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 59(1), pages 147-167, May.
    8. Luciano De Castro & Nicholas C. Yannelis, 2011. "Ambiguity aversion solves the conflict between efficiency and incentive compatibility," Economics Discussion Paper Series 1106, Economics, The University of Manchester.
    9. John Dickhaut & Radhika Lunawat & Kira Pronin & Jack Stecher, 2011. "Decision making and trade without probabilities," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 48(2), pages 275-288, October.
    10. Xiaojuan Hu & Cheng-Zhong Qin, 2013. "Information acquisition and welfare effect in a model of competitive financial markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 54(1), pages 199-210, September.
    11. Zhiwei Liu & Nicholas C. Yannelis, 2013. "Implementation under ambiguity: the maximin core," Economics Discussion Paper Series 1319, Economics, The University of Manchester.
    12. Scott Condie & Jayant Ganguli, 2011. "Informational efficiency with ambiguous information," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 48(2), pages 229-242, October.
    13. Ganguli, Jayant & Condie, Scott, 2012. "The pricing effects of ambiguous private information," Economics Discussion Papers 5631, University of Essex, Department of Economics.
    14. Luciano Castro & Marialaura Pesce & Nicholas Yannelis, 2011. "Core and equilibria under ambiguity," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 48(2), pages 519-548, October.
    15. Nabil I. Al-Najjar & Luciano De Castro, 2010. "Uncertainty, Efficiency and Incentive Compatibility," Discussion Papers 1532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.

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