 Coordination of Expectations: The Eductive Stability ViewpointAnnual Review of Economics, 2014, vol. 6, issue 1, 273-298 Abstract: The eductive approach consists of finding solutions consistent with common knowledge of individual rationality and the model. An equilibrium is stable whenever it is the unique outcome consistent with these assumptions. This is a strong stability criterion as it relies on no assumption of prior knowledge of others’ expectations. This review presents various (in)stability results. It focuses on the following method: Rewrite the model as a temporary equilibrium map in which the current economic outcome is determined by expectations and characterize stability by contracting properties of this map. The main insight suggested by these results is due to Guesnerie (2002): Stability is obtained when the actual outcome is not very sensitive to expectations. Additional insights include that agents’ heterogeneity is a source of instability; the ability of prices to transmit information is limited by the quality of private information; and coordination when agents are infinitely lived is difficult because of the large effect of long-run expectations. Keywords: common knowledge; dominance solvability; learning; rational expectations equilibrium; rationalizability (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:anr:reveco:v:6:y:2014:p:273-298 Ordering information: This journal article can be ordered from Access Statistics for this article More articles in Annual Review of Economics from Annual Reviews Annual Reviews 4139 El Camino Way Palo Alto, CA 94306, USA. |
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