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Coarse Competitive Equilibrium and Extreme Prices

Listed author(s):
  • Faruk Gul
  • Wolfgang Pesendorfer
  • Tomasz Strzalecki

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.

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File URL: http://scholar.harvard.edu/tomasz/node/8365
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Paper provided by Harvard University OpenScholar in its series Working Paper with number 8365.

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Handle: RePEc:qsh:wpaper:8365
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  1. 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.
  2. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  3. 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.
  4. 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, Oxford University Press, vol. 117(4), pages 1295-1328.
  5. Xavier Gabaix, 2014. "A Sparsity-Based Model of Bounded Rationality," The Quarterly Journal of Economics, Oxford University Press, vol. 129(4), pages 1661-1710.
  6. Jehiel, Philippe, 2005. "Analogy-based expectation equilibrium," Journal of Economic Theory, Elsevier, vol. 123(2), pages 81-104, August.
  7. Neyman, Abraham, 1985. "Bounded complexity justifies cooperation in the finitely repeated prisoners' dilemma," Economics Letters, Elsevier, vol. 19(3), pages 227-229.
  8. 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.
  9. Andrea Wilson, 2014. "Bounded Memory and Biases in Information Processing," Econometrica, Econometric Society, vol. 82, pages 2257-2294, November.
  10. 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.
  11. Rubinstein, Ariel, 1986. "Finite automata play the repeated prisoner's dilemma," Journal of Economic Theory, Elsevier, vol. 39(1), pages 83-96, June.
  12. 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.
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