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Rational expectations in urban economics

  • Berliant, Marcus
  • Yu, Chia-Ming

Canonical analysis of the classical general equilibrium model demonstrates the existence of an open and dense subset of standard economies that possess fully-revealing rational expectations equilibria. This paper shows that the analogous result is not true in urban economies. An open subset of economies where none of the rational expectations equilibria fully reveal private information is found. There are two important pieces. First, there can be information about a location known by a consumer who does not live in that location in equilibrium, and thus the equilibrium rent does not reflect this information. Second, if a consumer’s utility depends only on information about their (endogenous) location of residence, perturbations of utility naturally do not incorporate information about other locations conditional on their location of residence. Existence of a rational expectations equilibrium is proved. Space can prevent housing prices from transmitting information from informed to uninformed households, resulting in an inefficient outcome.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 12709.

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Date of creation: 13 Jan 2009
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Handle: RePEc:pra:mprapa:12709
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  1. Jordan, J. S., 1982. "The generic existence of rational expectations equilibrium in the higher dimensional case," Journal of Economic Theory, Elsevier, vol. 26(2), pages 224-243, April.
  2. Berliant, Marcus & Yu, Chia-Ming, 2012. "Rational Expectations in Urban Economics," MPRA Paper 41356, University Library of Munich, Germany.
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  30. Roback, Jennifer, 1982. "Wages, Rents, and the Quality of Life," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1257-78, December.
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