IDEAS home Printed from https://ideas.repec.org/p/qsh/wpaper/8365.html
   My bibliography  Save this paper

Coarse Competitive Equilibrium and Extreme Prices

Author

Listed:
  • Faruk Gul
  • Wolfgang Pesendorfer
  • Tomasz Strzalecki

Abstract

We introduce a notion of coarse competitive equilibrium (CCE), to study agents' inability to tailor their consumption to the state of the economy. Our notion is motivated by limited cognitive ability (in particular attention, memory, and complexity) and it maintains the complete market structure of competitive equilibrium. Compared to standard competitive equilibrium, our concept yields riskier allocations and more extreme prices. We provide a tractable model that is suitable for general equilibrium analysis as well as asset pricing.

Suggested Citation

  • Faruk Gul & Wolfgang Pesendorfer & Tomasz Strzalecki, "undated". "Coarse Competitive Equilibrium and Extreme Prices," Working Paper 8365, Harvard University OpenScholar.
    • Handle: RePEc:qsh:wpaper:8365
    as

    Download full text from publisher

    File URL: http://scholar.harvard.edu/tomasz/node/8365
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    2. Constantinides, George M & Duffie, Darrell, 1996. "Asset Pricing with Heterogeneous Consumers," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 219-240, April.
    3. Xavier Gabaix, 2014. "A Sparsity-Based Model of Bounded Rationality," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 129(4), pages 1661-1710.
    4. Jehiel, Philippe, 2005. "Analogy-based expectation equilibrium," Journal of Economic Theory, Elsevier, vol. 123(2), pages 81-104, August.
    5. Neyman, Abraham, 1985. "Bounded complexity justifies cooperation in the finitely repeated prisoners' dilemma," Economics Letters, Elsevier, vol. 19(3), pages 227-229.
    6. Grossman, Sanford J & Laroque, Guy, 1990. "Asset Pricing and Optimal Portfolio Choice in the Presence of Illiquid Durable Consumption Goods," Econometrica, Econometric Society, vol. 58(1), pages 25-51, January.
    7. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(4), pages 1295-1328.
    8. Faruk Gul & Wolfgang Pesendorfer & Tomasz Strzalecki, 2017. "Coarse Competitive Equilibrium and Extreme Prices," American Economic Review, American Economic Association, vol. 107(1), pages 109-137, January.
    9. Ellis, Andrew, 2018. "Foundations for optimal inattention," Journal of Economic Theory, Elsevier, vol. 173(C), pages 56-94.
    10. Piccione, Michele & Rubinstein, Ariel, 1997. "On the Interpretation of Decision Problems with Imperfect Recall," Games and Economic Behavior, Elsevier, vol. 20(1), pages 3-24, July.
    11. Krebs, Tom, 2004. "Testable implications of consumption-based asset pricing models with incomplete markets," Journal of Mathematical Economics, Elsevier, vol. 40(1-2), pages 191-206, February.
    12. , G. & , & ,, 2007. "Coarse contingencies and ambiguity," Theoretical Economics, Econometric Society, vol. 2(4), December.
    13. Dekel, Eddie & Lipman, Barton L & Rustichini, Aldo, 2001. "Representing Preferences with a Unique Subjective State Space," Econometrica, Econometric Society, vol. 69(4), pages 891-934, July.
    14. Rubinstein, Ariel, 1986. "Finite automata play the repeated prisoner's dilemma," Journal of Economic Theory, Elsevier, vol. 39(1), pages 83-96, June.
    15. Andrea Wilson, 2014. "Bounded Memory and Biases in Information Processing," Econometrica, Econometric Society, vol. 82, pages 2257-2294, November.
    16. Lynch, Anthony W, 1996. "Decision Frequency and Synchronization across Agents: Implications for Aggregate Consumption and Equity Return," Journal of Finance, American Finance Association, vol. 51(4), pages 1479-1497, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bianchi, Milo & Jehiel, Philippe, 2020. "Bundlers' dilemmas in financial markets with sampling investors," Theoretical Economics, Econometric Society, vol. 15(2), May.
    2. Nunnari, Salvatore & Frydman, Cary, 2021. "Coordination with Cognitive Noise," CEPR Discussion Papers 16644, C.E.P.R. Discussion Papers.
    3. Milo Bianchi & Philippe Jehiel, 2019. "Bundling, Belief Dispersion, and Mispricing in Financial Markets," PSE Working Papers halshs-02183306, HAL.
    4. Xavier Gabaix, 2017. "Behavioral Inattention," NBER Working Papers 24096, National Bureau of Economic Research, Inc.
    5. Saponara, Nick, 2022. "Revealed reasoning," Journal of Economic Theory, Elsevier, vol. 199(C).
    6. Teeple, Keisuke, 2023. "Surprise and default in general equilibrium," Theoretical Economics, Econometric Society, vol. 18(4), November.
    7. Mira Frick & Ryota Iijima & Yuhta Ishii, 2020. "Misinterpreting Others and the Fragility of Social Learning," Econometrica, Econometric Society, vol. 88(6), pages 2281-2328, November.
    8. Faruk Gul & Wolfgang Pesendorfer & Tomasz Strzalecki, 2017. "Coarse Competitive Equilibrium and Extreme Prices," American Economic Review, American Economic Association, vol. 107(1), pages 109-137, January.
    9. Burkovskaya, Anastasia & Li, Jian, 2020. "Comparative Profitability of Product Disclosure Statements," Working Papers 2020-01, University of Sydney, School of Economics.
    10. Lunn, Pete & Somerville, Jason J., 2015. "Surplus Identification with Non-Linear Returns," Papers WP522, Economic and Social Research Institute (ESRI).
    11. Milo Bianchi & Philippe Jehiel, 2012. "Financial reporting and market e¢ ciency with extrapolative investors," Levine's Working Paper Archive 786969000000000451, David K. Levine.
    12. Galanis, Spyros, 2018. "Financial complexity and trade," Games and Economic Behavior, Elsevier, vol. 112(C), pages 219-230.
    13. Yuan Gu & Chao Hung Chan, 2024. "Complexity Aversion," Papers 2406.18463, arXiv.org.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Xavier Gabaix, 2017. "Behavioral Inattention," NBER Working Papers 24096, National Bureau of Economic Research, Inc.
    2. Yuan Gu & Chao Hung Chan, 2024. "Complexity Aversion," Papers 2406.18463, arXiv.org.
    3. Philippe Jehiel, 2022. "Analogy-Based Expectation Equilibrium and Related Concepts:Theory, Applications, and Beyond," Working Papers halshs-03735680, HAL.
    4. Jehiel, Philippe, 2005. "Analogy-based expectation equilibrium," Journal of Economic Theory, Elsevier, vol. 123(2), pages 81-104, August.
    5. Wichardt, Philipp C., 2010. "Modelling equilibrium play as governed by analogy and limited foresight," Games and Economic Behavior, Elsevier, vol. 70(2), pages 472-487, November.
    6. Galanis, Spyros, 2018. "Financial complexity and trade," Games and Economic Behavior, Elsevier, vol. 112(C), pages 219-230.
    7. Saponara, Nick, 2022. "Revealed reasoning," Journal of Economic Theory, Elsevier, vol. 199(C).
    8. Jonathan A. Parker, 2001. "The Consumption Risk of the Stock Market," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(2), pages 279-348.
    9. Philippe Jehiel & Jakub Steiner, 2020. "Selective Sampling with Information-Storage Constraints [On interim rationality, belief formation and learning in decision problems with bounded memory]," The Economic Journal, Royal Economic Society, vol. 130(630), pages 1753-1781.
    10. Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, 2020. "Memory, Attention, and Choice," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(3), pages 1399-1442.
    11. Bartosz Maćkowiak & Filip Matějka & Mirko Wiederholt, 2023. "Rational Inattention: A Review," Journal of Economic Literature, American Economic Association, vol. 61(1), pages 226-273, March.
    12. Leung, Benson Tsz Kin, 2020. "Limited cognitive ability and selective information processing," Games and Economic Behavior, Elsevier, vol. 120(C), pages 345-369.
    13. Kalyvitis Sarantis & Panopoulou Ekaterini, 2013. "Estimating C-CAPM and the equity premium over the frequency domain," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 17(5), pages 551-571, December.
    14. Suresh M. Sundaresan, 2000. "Continuous‐Time Methods in Finance: A Review and an Assessment," Journal of Finance, American Finance Association, vol. 55(4), pages 1569-1622, August.
    15. Monte, Daniel, 2013. "Bounded memory and permanent reputations," Journal of Mathematical Economics, Elsevier, vol. 49(5), pages 345-354.
    16. Philippe Bacchetta & Eric Van Wincoop, 2006. "Incomplete information processing: a solution to the forward discount puzzle," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
    17. Yuval Salant & Jörg L. Spenkuch, 2021. "Complexity and Choice," CESifo Working Paper Series 9239, CESifo.
    18. Spiegler, Ran, 2005. "Testing threats in repeated games," Journal of Economic Theory, Elsevier, vol. 121(2), pages 214-235, April.
    19. Nobuo Koida, 2018. "Anticipated stochastic choice," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 65(3), pages 545-574, May.
    20. Atilla Aras, 2021. "Solution to the Equity Premium Puzzle Using the Sufficiency Factor of the Model," Papers 2110.14405, arXiv.org, revised Sep 2022.

    More about this item

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:qsh:wpaper:8365. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Richard Brandon (email available below). General contact details of provider: https://edirc.repec.org/data/cbrssus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.