Rational Expectations and Farsighted Stability

Bhaskar Dutta and Rajiv Vohra

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

Abstract: In the study of farsighted coalitional behavior, a central role is played by the von Neumann-Morgenstern (1944) stable set and its modification that incorporates farsightedness. Such a modification was first proposed by Harsanyi (1974) and has recently been re-formulated by Ray and Vohra (2015). The farsighted stable set is based on a notion of indirect dominance in which an outcome can be dominated by a chain of coalitional ‘moves’ in which each coalition that is involved in the sequence eventually stands to gain. However, it does not require that each coalition make a maximal move, i.e., one that is not Pareto dominated (for the members of the coalition in question) by another. Nor does it restrict coalitions to hold common expectations regarding the continuation path from every state. Consequently, when there are multiple continuation paths the farsighted stable set can yield unreasonable predictions. We resolve this difficulty by requiring all coalitions to have common rational expectations about the transition from one outcome to another. This leads to two related concepts: the rational expectations farsighted stable set (REFS) and the strong rational expectations farsighted stable set (SREFS). We apply these concepts to simple games and to pillage games to illustrate the consequences of imposing rational expectations for farsighted stability.

Keywords: stable sets; farsightedness; consistency; maximality; rational expectations; simple games; pillage games. Classification -JEL: C71; D72; D74 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-gth, nep-hpe and nep-mic
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Related works:
Journal Article: Rational expectations and farsighted stability (2017)
Working Paper: Rational Expectations and Farsighted Stability (2015)
Working Paper: Rational Expectations and Farsighted Stability (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:1090

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