IDEAS home Printed from https://ideas.repec.org/a/eee/matsoc/v115y2022icp37-46.html
   My bibliography  Save this article

Dropping rational expectations

Author

Listed:
  • de Boisdeffre, Lionel

Abstract

We consider a two-period pure-exchange economy, where uncertainty prevails and agents, possibly asymmetrically informed, exchange commodities and securities of all kinds. Consumers’ characteristics, anticipations, beliefs and actions are all private and typically not known nor assessed by the other agents. This setting drops rational expectations along the ‘common knowledge of rationality and market clearing’ (CKRMC) assumptions, and, in particular, it drops the Radner (1979) price model and price inference assumptions. Unaware agents are shown to face an incompressible uncertainty over future states and prices, represented by a so-called ”minimum uncertainty set”. A sequential equilibrium obtains when agents expect the ‘true’ price as a possible outcome on every spot market, and elect optimal market-clearing strategies. This so-called ”correct foresight equilibrium” (CFE) is shown to exist whenever agents’ anticipation sets include the minimum uncertainty set. When the CKRMC assumptions are restored, the CFE is shown to lead to an overarching concept of rational expectations equilibrium, which generalizes the classical concepts.

Suggested Citation

  • de Boisdeffre, Lionel, 2022. "Dropping rational expectations," Mathematical Social Sciences, Elsevier, vol. 115(C), pages 37-46.
  • Handle: RePEc:eee:matsoc:v:115:y:2022:i:c:p:37-46
    DOI: 10.1016/j.mathsocsci.2021.12.005
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165489621001220
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.mathsocsci.2021.12.005?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Bernard Cornet & Lionel Boisdeffre, 2009. "Elimination of arbitrage states in asymmetric information models," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 38(2), pages 287-293, February.
    2. Bernard Cornet & Lionel Boisdeffre, 2009. "Elimination of arbitrage states in asymmetric information models," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 38(2), pages 287-293, February.
    3. Ho-Mou Wu & Mordecai Kurz, 1996. "Endogenous uncertainty in a general equilibrium model with price contingent contracts (*)," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 8(3), pages 461-488.
    4. Lionel De Boisdeffre, 2021. "Equilibrium in incomplete markets with differential information: A basic model of generic existence," Documents de travail du Centre d'Economie de la Sorbonne 21008, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    5. Lionel Boisdeffre, 2007. "No-arbitrage Equilibria with Differential Information: An Existence Proof," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 31(2), pages 255-269, May.
    6. Dutta, Jayasri & Morris, Stephen, 1997. "The Revelation of Information and Self-Fulfilling Beliefs," Journal of Economic Theory, Elsevier, vol. 73(1), pages 231-244, March.
    7. Bernard Cornet & Lionel Boisdeffre, 2009. "Elimination of arbitrage states in asymmetric information models," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 38(2), pages 287-293, February.
    8. Lionel De Boisdeffre, 2016. "Learning from arbitrage," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01871266, HAL.
    9. Ben-Porath, Elchanan & Heifetz, Aviad, 2011. "Common knowledge of rationality and market clearing in economies with asymmetric information," Journal of Economic Theory, Elsevier, vol. 146(6), pages 2608-2626.
    10. McAllister, Patrick H., 1990. "Rational behavior and rational expectations," Journal of Economic Theory, Elsevier, vol. 52(2), pages 332-363, December.
    11. Radner, Roy, 1979. "Rational Expectations Equilibrium: Generic Existence and the Information Revealed by Prices," Econometrica, Econometric Society, vol. 47(3), pages 655-678, May.
    12. Kreps, David M., 1977. "A note on "fulfilled expectations" equilibria," Journal of Economic Theory, Elsevier, vol. 14(1), pages 32-43, February.
    13. Radner, Roy, 1972. "Existence of Equilibrium of Plans, Prices, and Price Expectations in a Sequence of Markets," Econometrica, Econometric Society, vol. 40(2), pages 289-303, March.
    14. Lionel De Boisdeffre, 2016. "Learning from arbitrage," Post-Print hal-01871266, HAL.
    15. Cornet, Bernard & De Boisdeffre, Lionel, 2002. "Arbitrage and price revelation with asymmetric information and incomplete markets," Journal of Mathematical Economics, Elsevier, vol. 38(4), pages 393-410, December.
    16. de Boisdeffre, Lionel, 2021. "Equilibrium in incomplete markets with differential information: A basic model of generic existence," Mathematical Social Sciences, Elsevier, vol. 110(C), pages 53-62.
    Full references (including those not matched with items on IDEAS)

    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. de Boisdeffre, Lionel, 2021. "Equilibrium in incomplete markets with differential information: A basic model of generic existence," Mathematical Social Sciences, Elsevier, vol. 110(C), pages 53-62.
    2. Lionel de Boisde¤re, 2021. "Equilibrium in incomplete markets with differential information: A basic model of generic existence," Post-Print halshs-03196857, HAL.
    3. Lionel De Boisdeffre, 2018. "Equilibrium with Differential Information and Exogenous Beliefs: A Basic Model of Full Existence," Working papers of CATT hal-02141059, HAL.
    4. Lionel de Boisde¤re, 2021. "Dropping Rational Expectations," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-03196897, HAL.
    5. Lionel de Boisde¤re, 2021. "Equilibrium in incomplete markets with differential information: A basic model of generic existence," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-03196857, HAL.
    6. Lionel de Boisde¤re, 2021. "Dropping Rational Expectations," Post-Print halshs-03196897, HAL.
    7. Lionel de Boisdeffre, 2018. "Sequential equilibrium without rational expectations of prices: A theorem of full existence," Post-Print halshs-01593567, HAL.
    8. Lionel de Boisdeffre, 2021. "Dropping the Cass Trick and Extending Cass' Theorem to Asymmetric Information and Restricted Participation," Post-Print halshs-03196923, HAL.
    9. Lionel De Boisdeffre, 2017. "Sequential equilibrium without rational expectations of prices: an existence proof," Working Papers hal-02938599, HAL.
    10. Lionel De Boisdeffre, 2017. "Sequential Equilibrium without Rational Expectations of Prices: A Theorem of Full Existence," Working papers of CATT hal-02938743, HAL.
    11. Lionel De Boisdeffre, 2015. "Price revelation and existence of financial equilibrium with incomplete markets and private beliefs," Working papers of CATT hal-02943034, HAL.
    12. Lionel De Boisdeffre, 2017. "Sequential equilibrium without rational expectations of prices: an existence proof," Working papers of CATT hal-02938599, HAL.
    13. Lionel De Boisdeffre, 2015. "Learning from arbitrage," Working papers of CATT hal-01871573, HAL.
    14. Lionel De Boisdeffre, 2015. "Dropping rational expectations," Working Papers hal-02942197, HAL.
    15. Lionel de Boisdeffre, 2021. "Dropping the Cass Trick and Extending Cass' Theorem to Asymmetric Information and Restricted Participation," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-03196923, HAL.
    16. Lionel De Boisdeffre, 2018. "Dropping Rational Expectations," Post-Print halshs-01903510, HAL.
    17. Lionel De Boisdeffre, 2015. "Dropping rational expectations," Working papers of CATT hal-02942197, HAL.
    18. Lionel De Boisdeffre, 2017. "Sequential Equilibrium without Rational Expectations of Prices: A Theorem of Full Existence," Working Papers hal-02938743, HAL.
    19. Lionel De Boisdeffre, 2018. "Equilibrium with Differential Information and Exogenous Beliefs: A Basic Model of Full Existence," Working Papers hal-02141059, HAL.
    20. Lionel De Boisdeffre, 2018. "Equilibrium with Differential Information and Exogenous Beliefs: A Basic Model of Full Existence," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-02141059, HAL.

    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:eee:matsoc:v:115:y:2022:i:c:p:37-46. See general information about how to correct material in RePEc.

    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: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505565 .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.