Uncertainty and Disagreement in Equilibrium Models

Nabil I. Al-Najjar and Eran Shmaya

Journal of Political Economy, 2015, vol. 123, issue 4, 778 - 808

Abstract: Leading equilibrium concepts require agents' beliefs to coincide with the model's true probabilities and thus be free of systematic errors. This implicitly assumes a criterion that tests beliefs against the observed outcomes generated by the model. We formalize this requirement in stationary environments. We show that there is a tension between requiring that beliefs can be tested against systematic errors and allowing agents to disagree or be uncertain about the long-run fundamentals. We discuss the application of our analysis to asset pricing, Markov perfect equilibria, and dynamic games.

Date: 2015
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