Expecting and Affecting

Michael Bacharach

Oxford Economic Papers, 1989, vol. 41, issue 2, 339-55

Abstract: In a very common type of economic model, agents choose their actions on the basis of their expectations of economic variables which, on the other hand, their actions collectively determine. The author shows that such models cannot legitimately be closed by imposing rational expectations. This is because if the agents are epistemically rational then, if they come to know the model, it is thereby changed. The outcome is now given by the solution, if any, of a game that rational agents are obliged to play. One implication is that a common picture of competition is incompatible with optimizing behavior. Copyright 1989 by Royal Economic Society.

Date: 1989
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