Incentive compatibility of rational expectations equilibrium in large economies: a counterexample

Yeneng Sun (), Lei Wu () and Nicholas C. Yannelis ()
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Yeneng Sun: National University of Singapore
Lei Wu: J.P. Morgan
Nicholas C. Yannelis: University of Iowa

Economic Theory Bulletin, 2013, vol. 1, issue 1, No 2, 3-10

Abstract: Abstract This note provides a counterexample for a large economy in which a rational expectations equilibrium (REE) does not possess the desirable property of incentive compatibility for each agent. The key point here is that the REE equilibrium price depends on the private information of every individual agent. Thus, we propose to focus on those REE prices that depend only on the macro states and are not influenced by individual agents’ private information. Such a REE will be incentive compatible.

Keywords: Asymmetric information; Rational expectations equilibrium; Efficiency; Incentive compatibility; Fubini extension; Exact law of large numbers (search for similar items in EconPapers)
JEL-codes: C70 D50 D82 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (6)

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DOI: 10.1007/s40505-013-0010-8

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