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On endogenous formation of price expectations

Cuong Le Van, Paulina Navrouzoglou and Yiannis Vailakis

Games and Economic Behavior, 2019, vol. 115, issue C, 436-458

Abstract: We study a two-period exchange economy with complete financial markets and endogenous borrowing constraints. Contrary to perfect foresight paradigm, we assume that agents are heterogeneous in their ability to forecast future prices. We introduce a new equilibrium concept, called informationally constrained equilibrium, where the formation of price expectations is endogenous and reflects the revelation of information from observing bounds on liabilities designed to ensure solvency at any contingency. We prove that, under standard assumptions, an equilibrium always exists and we characterize the degree of information revealed by the endogenous debt limits.

Keywords: Perfect foresight; Price expectations; Endogenous borrowing constraints (search for similar items in EconPapers)
JEL-codes: D53 D81 D82 D84 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.geb.2019.03.004

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Handle: RePEc:eee:gamebe:v:115:y:2019:i:c:p:436-458