Rationalizable Information Equilibria
40 Pages Posted: 5 Jun 2017
Date Written: June 2, 2017
Abstract
Rational expectations equilibria (REE) assume that the ex post equilibrium price function is able to reveal ex ante information. This paper drops the assumption of information revealing prices and instead constructs an internal reasoning process through which highly rational price-takers can infer information from other market participants under the assumption that their utility maximization problems are common knowledge. Based on this reasoning process, we introduce the novel competitive equilibrium concept of rationalizable information equilibria (RIE). Our formal analysis establishes that (i) the RIE concept amounts to a refinement of the (generalized) REE concept whereby (ii) REE with interior net-trades are generically RIE.
Keywords: General Equilibrium, Asset Exchange Economies, Asymmetric Information, Rational Expectations, Generalized Rational Expectations, Rationalizability
JEL Classification: D53, D83
Suggested Citation: Suggested Citation