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The Generalized Euler Equation and the Bankruptcy-Sovereign Default Problem

Author

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  • J. Aislinn Bohren

    (University of Pennsylvania)

  • Daniel N. Hauser

    (University School of Business and Helsinki)

Abstract

We develop a flexible model of confirmation bias, in which individuals misinterpret signals as stronger evidence for the state favored by their prior than they actually are. The bias varies with the agent's current belief, nesting Rabin and Schrag (1999) as a special case. In an individual learning setting, incorrect learning arises with positive probability when the bias is severe, generalizing existing work. By contrast, in a social learning setting, correct learning obtains almost surely regardless of the severity of bias. Whereas social information typically introduces inefficiencies, here it mitigates them: social interaction overcomes bias that would otherwise generate incorrect learning.Length: 25 pages

Suggested Citation

  • J. Aislinn Bohren & Daniel N. Hauser, 2026. "The Generalized Euler Equation and the Bankruptcy-Sovereign Default Problem," PIER Working Paper Archive 26-010, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    • Handle: RePEc:pen:papers:26-010
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