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On the Limit Points of an Infinitely Repeated Rational Expectations Equilibrium

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Abstract

We show that a symmetric information Rational Expectations Equilibrium (REE) exists universally (and not generically), it is Pareto efficient and obviously incentive compatible. Agents, in a repeated economy framework, can reach a symmetric information REE (i.e., an efficient and incentive compatible equilibrium outcome) by observing the past asymmetric REE and also by updating their private information. We also prove the converse result, i.e., given a symmetric information REE, we can construct a sequence of approximate asymmetric REE allocations that converges to the symmetric information REE. The approximate REE can be interpreted as the mistakes that agents make due to bounded rationality, nonetheless, in the limit an exact symmetric information REE is reached. In view of the above results, the symmetric information REE provides a rationalization for the asymmetric one.

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  • Marialaura Pesce & Niccolo Urbinati & Nicholas C. Yannelis, 2023. "On the Limit Points of an Infinitely Repeated Rational Expectations Equilibrium," CSEF Working Papers 677, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    • Handle: RePEc:sef:csefwp:677
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    1. Dionysius Glycopantis & Allan Muir & Nicholas Yannelis, 2009. "On non-revealing rational expectations equilibrium," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 38(2), pages 351-369, February.
    2. Kreps, David M., 1977. "A note on "fulfilled expectations" equilibria," Journal of Economic Theory, Elsevier, vol. 14(1), pages 32-43, February.
    3. Luciano I. Castro & Marialaura Pesce & Nicholas C. Yannelis, 2020. "A new approach to the rational expectations equilibrium: existence, optimality and incentive compatibility," Annals of Finance, Springer, vol. 16(1), pages 1-61, March.
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    Cited by:

    1. Enrique Urbano Arellano & Xinyang Wang, 2023. "Social Learning of General Rules," Papers 2310.15861, arXiv.org.

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    Keywords

    Learning; Rational expectations equilibrium; Asymmetric information; Stability.;
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