The Pareto Domination of Irrational Expectations over Rational Expectations

Michael Teit Nielsen
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Michael Teit Nielsen: Institute of Economics, University of Copenhagen

No 87-01, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: A simple overlapping generations economy, with one consumer in ever y generation and with one consumption good in every period, is consider ed. It is shown that a sequence of temporary equilibria generated by an " "irrational" inelastic expectation function always generates an allocation which Pareto dominates the corresponding allocation generated by the rational expectation function. Furthermore, it is shown that, in spite of systematic prediction errors, such an allocation is also efficient.

Keywords: theory; of; uncertainty; and; information (search for similar items in EconPapers)
Pages: 18 pages
Date: 1987-12
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Published in: Journal of Economic Theory, 1988, 46(2) pp 322-34

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Persistent link: https://EconPapers.repec.org/RePEc:kud:kuiedp:8701

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