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Decision Making in the Presence of Heterogeneous Information and Social Interactions

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  • Binder, Michael
  • Pesaran, M Hashem

Abstract

The authors consider the solution of multivariate linear rational expectations models in the presence of heterogeneous information and social interactions. To overcome the 'infinite regress in expectations' problem that arises in the solution of these models, we assume that agents' expectations about the decisions and expectations of other agents are based solely on public information. They show that the resulting solutions satisfy the key postulates of the rational expectations hypothesis, but can nevertheless exhibit dynamic properties quite different from those under homogeneous information. The authors illustrate this by analyzing a model of firms' optimal factor demand decisions. In this model, the presence of information heterogeneity may accentuate the propagation effects of external shocks on firms' factor demands. Copyright 1998 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Binder, Michael & Pesaran, M Hashem, 1998. "Decision Making in the Presence of Heterogeneous Information and Social Interactions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 1027-1052, November.
    • Handle: RePEc:ier:iecrev:v:39:y:1998:i:4:p:1027-52
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    Cited by:

    1. Pesaran, M. Hashem & Weale, Martin, 2006. "Survey Expectations," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 1, chapter 14, pages 715-776, Elsevier.
    2. Michael R. Wickens & Roberto Motto, 2001. "Estimating shocks and impulse response functions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 371-387.
    3. Adam, Klaus, 2007. "Optimal monetary policy with imperfect common knowledge," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 267-301, March.
    4. Ioannides, Yannis M. & Soetevent, Adriaan R., 2007. "Social networking and individual outcomes beyond the mean field case," Journal of Economic Behavior & Organization, Elsevier, vol. 64(3-4), pages 369-390.
    5. YANNIS M. IOANNIDES & Adriaan R. Soetevent, 2005. "Social Networking And Individual Outcomes: Individual Decisions And Market Context," Working Papers 05-16, NET Institute, revised Oct 2005.
    6. Backé, Peter, 2003. "Optimal monetary policy with imperfect common knowledge," Working Paper Series 223, European Central Bank.
    7. Kenneth Kasa, 2000. "Forecasting the Forecasts of Others in the Frequency Domain," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(4), pages 726-756, October.
    8. Ripamonti, Alexandre, 2013. "Rational Valuation Formula (RVF) and Time Variability in Asset Rates of Return," MPRA Paper 79460, University Library of Munich, Germany.
    9. Zhao, Chuanmin & Qu, Xi, 2021. "Peer effects in pension decision-making: evidence from China's new rural pension scheme," Labour Economics, Elsevier, vol. 69(C).
    10. Binder, Michael & Pesaran, M. Hashem, 2001. "Life-cycle consumption under social interactions," Journal of Economic Dynamics and Control, Elsevier, vol. 25(1-2), pages 35-83, January.

    More about this item

    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)

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