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Coarse Competitive Equilibrium and Extreme Prices

Author

Listed:
  • Wolfgang Pesendorfer

    (Princeton University)

  • Tomasz Strzalecki

    (Harvard University)

  • Faruk Gul

    (Princeton University)

Abstract

(CCE), to study households' 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 (both for consumption and for assets). Thus, limited cognitive ability can produce market data that are usually attributed to heightened degrees of risk aversion. We provide a tractable model that is suitable for general equilibrium analysis as well as asset pricing in dynamic environment.

Suggested Citation

  • Wolfgang Pesendorfer & Tomasz Strzalecki & Faruk Gul, 2014. "Coarse Competitive Equilibrium and Extreme Prices," 2014 Meeting Papers 1412, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:1412
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    Citations

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    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. 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.
    8. Lunn, Pete & Somerville, Jason J., 2015. "Surplus Identification with Non-Linear Returns," Papers WP522, Economic and Social Research Institute (ESRI).
    9. Burkovskaya, Anastasia & Li, Jian, 2020. "Comparative Profitability of Product Disclosure Statements," ISU General Staff Papers 202002040800001095, Iowa State University, Department of Economics.
    10. 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.
    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. Auster, Sarah & Kettering, Jeremy & Kochov, Asen, 2024. "Sequential trading with coarse contingencies," Journal of Economic Theory, Elsevier, vol. 220(C).
    13. Galanis, Spyros, 2018. "Financial complexity and trade," Games and Economic Behavior, Elsevier, vol. 112(C), pages 219-230.
    14. Yuan Gu & Chao Hung Chan, 2024. "Complexity Aversion," Papers 2406.18463, arXiv.org.

    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)

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