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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
    as

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    References listed on IDEAS

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    1. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
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    3. Xavier Gabaix, 2014. "A Sparsity-Based Model of Bounded Rationality," The Quarterly Journal of Economics, Oxford University Press, vol. 129(4), pages 1661-1710.
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    Cited by:

    1. Lunn, Pete & Somerville, Jason J., 2015. "Surplus Identification with Non-Linear Returns," Papers WP522, Economic and Social Research Institute (ESRI).
    2. Milo Bianchi & Philippe Jehiel, 2012. "Financial reporting and market e¢ ciency with extrapolative investors," Levine's Working Paper Archive 786969000000000451, David K. Levine.
    3. Xavier Gabaix, 2017. "Behavioral Inattention," NBER Working Papers 24096, National Bureau of Economic Research, Inc.

    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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