LEARNING FROM THE EXPECTATIONS OF OTHERS

Jim Granato, Eran Guse and M. C. Sunny Wong ()

Macroeconomic Dynamics, 2008, vol. 12, issue 3, 345-377

Abstract: This paper explores the equilibrium properties of boundedly rational heterogeneous agents under adaptive learning. In a modified cobweb model with a Stackelberg framework, there is an asymmetric information diffusion process from leading to following firms. It turns out that the conditions for at least one learnable equilibrium are similar to those under homogeneous expectations. However, the introduction of information diffusion leads to the possibility of multiple equilibria and can expand the parameter space of potential learnable equilibria. In addition, the inability to correctly interpret expectations will cause a “boomerang effect” on the forecasts and forecast efficiency of the leading firms. The leading firms' mean square forecast error can be larger than that of following firms if the proportion of following firms is sufficiently large.

Date: 2008
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Working Paper: Learning from the Expectations of Others (2006)
Working Paper: Learning From the Expectations of Others (2006)
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