IDEAS home Printed from https://ideas.repec.org/p/red/sed018/137.html
   My bibliography  Save this paper

Recursive equilibria in dynamic economies withbounded rationality

Author

Listed:
  • Runjie Geng

    (University of Zurich)

Abstract

I provide a new way to model bounded rationality and show the existence of recursive equilibria with bounded rational agents. The existence proof applies to dynamic stochastic general equilibrium models with infinitely lived heterogeneous agents and incomplete markets. In this type of models, recursive methods are widely used to compute equilibria, yet recursive equilibria do not exist generically with rational agents. I change the rational expectation assumption and model bounded rationality as follows. Different from a rational agent, a bounded rational agent does not know the true Markov transition of the state space of the economy. In order to make decisions, the bounded rational agent would try to compute a stationary distribution of the state space using a numerical method and then use the Markov transition associated with it to maximize utility. For a certain distribution of the current period, given other agents' strategies, the agent would get its next-period transition: the distribution of the state space in the next period that results from the competitive equilibrium in the next period. However, if a distribution stays ``closer'' to its next-period transition than the minimum error the numerical method can observe, the agent would consider it as computational stationary. In equilibrium, each agent maximizes utility with a computational stationary distribution and markets clear. I use the Kantorovich-Rubinshtein norm to characterize the distance between distributions of the state space. With this set up, usual convergence criteria used in the literature can be incorporated and thus many computed equilibria in the literature using recursive methods can be categorized as bounded rational recursive equilibria in the sense of this paper.

Suggested Citation

  • Runjie Geng, 2018. "Recursive equilibria in dynamic economies withbounded rationality," 2018 Meeting Papers 137, Society for Economic Dynamics.
  • Handle: RePEc:red:sed018:137
    as

    Download full text from publisher

    File URL: https://economicdynamics.org/meetpapers/2018/paper_137.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Johannes Brumm & Dominika Kryczka & Felix Kubler, 2017. "Recursive Equilibria in Dynamic Economies With Stochastic Production," Econometrica, Econometric Society, vol. 85, pages 1467-1499, September.
    2. Hellwig, Martin F., 1983. "A note on the implementation of rational expectations equilibria," Economics Letters, Elsevier, vol. 11(1-2), pages 1-8.
    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Recursive equilibria in dynamic economies withbounded rationality
      by Christian Zimmermann in NEP-DGE blog on 2018-09-28 08:15:09

    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. Johannes Hörner & Larry Samuelson, 2013. "Incentives for experimenting agents," RAND Journal of Economics, RAND Corporation, vol. 44(4), pages 632-663, December.
    2. Drèze, Jacques H. & Herings, P. Jean-Jacques, 2008. "Sequentially complete markets remain incomplete," Economics Letters, Elsevier, vol. 100(3), pages 445-447, September.
    3. Alessandro Citanna & Paolo Siconolfi, 2008. "On the nonexistence of recursive equilibrium in stochastic OLG economies," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 37(3), pages 417-437, December.
    4. P. Herings & Kirsten Rohde, 2008. "On the completeness of complete markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 37(2), pages 171-201, November.
    5. Manuel S. Santos & Adrian Peralta-Alva, 2012. "Analysis of Numerical Errors," Working Papers 2012-6, University of Miami, Department of Economics.
    6. Leo Kaas, 2020. "Block-Recursive Equilibria in Heterogenous-Agent Models," CESifo Working Paper Series 8737, CESifo.
    7. Hellwig, Martin, 1996. "Rational expectations equilibria in sequence economies with symmetric information: The two-period case," Journal of Mathematical Economics, Elsevier, vol. 26(1), pages 9-49.
    8. Felix Kubler & Simon Scheidegger, 2018. "Self-justi ed equilibria: Existence and computation," 2018 Meeting Papers 694, Society for Economic Dynamics.
    9. Cao, Dan, 2020. "Recursive equilibrium in Krusell and Smith (1998)," Journal of Economic Theory, Elsevier, vol. 186(C).
    10. Balbus, Łukasz & Reffett, Kevin & Woźny, Łukasz, 2012. "Stationary Markovian equilibrium in altruistic stochastic OLG models with limited commitment," Journal of Mathematical Economics, Elsevier, vol. 48(2), pages 115-132.
    11. Felix Kubler & Herakles Polemarchakis, 2004. "Stationary Markov equilibria for overlapping generations," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 24(3), pages 623-643, October.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:red:sed018:137. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/sedddea.html .

    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: Christian Zimmermann (email available below). General contact details of provider: https://edirc.repec.org/data/sedddea.html .

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.