Expected Utility and Equilibrium with Subjective Choice Sets and Strategic Reporting

Abstract

This paper studies an economy where agents trade using a shared language, so that they do not need to meet in person with goods physically present. Agents provide vague descriptions of proposed net trades, which we interpret as arising either from inherent limitations in what the agents can describe or from strategic presentations of information. We construct a family of orders over terms in the language, arising from an individual's preferences over consumption as subjectively perceived, illustrate the induced order's properties, and show the constructive existence of competitive equilibrium. Finally, we illustrate the relationship between the existence of a competitive equilibrium obtained in the language and the one that would result from an interaction involving perceived consumption sets.

Keywords: shared language, strategic reporting, competitive equilibrium, fixed point, order, asymmetric information, perception

JEL Classification: D81, D83