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Rationalizable Expectations

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  • Elchanan Ben-Porath
  • Aviad Heifetz

Abstract

Consider an exchange economy with asymmetric information. What is the set of outcomes that are consistent with common knowledge of rationality and market clearing? We propose the concept of CKRMC as an answer to this question. The set of price functions that are CKRMC is the maximal set F with the property that every f?F defi?nes prices that clear the markets for demands that can be rationalized by some profile of subjective beliefs on F. Thus, the difference between CKRMC and Rational Expectations Equilibrium (REE) is that CKRMC allows for a situation where the agents do not know the true price function and furthermore may have different beliefs about it. We characterize CKRMC, study its properties, and apply it to a general class of economies with two commodities. CKRMC manifests intuitive properties that stand in contrast to the full revelation property of REE. In particular, we obtain that for a broad class of economies: (1) There is a whole range of prices that are CKRMC in every state. (2) The set of CKRMC outcomes is monotonic with the amount of information in the economy.

Suggested Citation

  • Elchanan Ben-Porath & Aviad Heifetz, 2006. "Rationalizable Expectations," Discussion Paper Series dp461, The Federmann Center for the Study of Rationality, the Hebrew University, Jerusalem.
    • Handle: RePEc:huj:dispap:dp461
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    References listed on IDEAS

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    1. 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.
    2. R. Guesnerie, 2002. "Anchoring Economic Predictions in Common Knowledge," Econometrica, Econometric Society, vol. 70(2), pages 439-480, March.
    3. Stephen Morris, "undated". ""Justifying Rational Expectations''," CARESS Working Papres 95-04, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
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    Cited by:

    1. Elchanan Ben-Porath, 2007. "Trade with Heterogeneous Beliefs," Discussion Paper Series dp462, The Federmann Center for the Study of Rationality, the Hebrew University, Jerusalem.
    2. Roger Guesnerie & Pedro Jara-Moroni, 2011. "Expectational coordination in simple economic contexts," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 47(2), pages 205-246, June.
    3. Elchanan Ben-Porath, 2007. "Trade with Heterogeneous Beliefs," Levine's Bibliography 122247000000001494, UCLA Department of Economics.

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