Formation of Rationally Heterogeneous Expectations

D. Pfajfar

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Abstract

Abstract: This paper models expectation formation by taking into account that agents produce heterogeneous expectations due to model uncertainty, informational frictions and different capacities for processing information. We show that there are two general classes of steady states within this framework: those where strictly dominated forecasting rules vanish, and intrinsic heterogeneous steady states where a positive proportion of agents use a more costly perfect foresight. This demonstrates that intrinsic heterogeneity can also arise in a model where the forecasting rules are not equally costly, and do not exhibit identical performance in the long run.
Original languageEnglish
Place of PublicationTilburg
PublisherEconomics
Number of pages39
Volume2012-083
Publication statusPublished - 2012

Publication series

NameCentER Discussion Paper
Volume2012-083

Keywords

  • Heterogeneous expectations
  • cobweb model
  • adaptive learning
  • rational expectations

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    Pfajfar, D. (2012). Formation of Rationally Heterogeneous Expectations. (CentER Discussion Paper; Vol. 2012-083). Economics.