Functional rational expectations equilibria in market games |
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Authors: | Jamsheed Shorish |
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Institution: | 1. Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria 2. Department of Economics, University of Illinois at Urbana-Champaign, Urbana, IL, 61801, USA
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Abstract: | The rational expectations equilibrium (REE) has been criticized as an equilibrium concept in market game environments. Such
an equilibrium may not exist generically, or it may introduce unrealistic assumptions about an economic agent’s knowledge
or computational ability. We define an REE as a probability measure over uncertain states of nature which exploits all available
information in a market game, and which exists for almost all economies. Furthermore, if retrading is allowed, it is possible
for agents to compute such a ‘functional rational expectations equilibrium’ using straightforward numerical fixed point algorithms.
The approach is demonstrated in a detailed numerical example. |
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Keywords: | |
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