Rational expectations equilibria of economies with local interactions

Alberto Bisin, Ulrich Horst, Onur Özgür

    Research output: Contribution to journalArticle

    Abstract

    We consider general economies in which rational agents interact locally. The local aspect of the interactions is designed to represent in a simple abstract way social interactions, that is, socioeconomic environments in which markets do not mediate all of agents' choices, which might be in part determined, for instance, by family, peer group, or ethnic group effects. We study static as well as dynamic infinite horizon economies; we allow for economies with incomplete information, and we consider jointly global and local interactions, to integrate e.g., global externalities and markets with peer and group effects. We provide conditions under which such economies have rational expectations equilibria. We illustrate the effects of local interactions when agents are rational by studying in detail the equilibrium properties of a simple economy with quadratic preferences which captures, in turn, local preferences for conformity, habit persistence, and preferences for status or adherence to aggregate norms of behavior.

    Original languageEnglish (US)
    Pages (from-to)74-116
    Number of pages43
    JournalJournal of Economic Theory
    Volume127
    Issue number1
    DOIs
    StatePublished - Mar 2006

    Fingerprint

    Rational expectations equilibrium
    Local interaction
    Social interaction
    Incomplete information
    Peer group
    Infinite horizon
    Externalities
    Interaction
    Habit persistence
    Adherence
    Socio-economics
    Peers
    Conformity
    Ethnic groups

    Keywords

    • Existence of equilibria
    • Local interactions
    • Rational expectations

    ASJC Scopus subject areas

    • Economics and Econometrics

    Cite this

    Rational expectations equilibria of economies with local interactions. / Bisin, Alberto; Horst, Ulrich; Özgür, Onur.

    In: Journal of Economic Theory, Vol. 127, No. 1, 03.2006, p. 74-116.

    Research output: Contribution to journalArticle

    Bisin, Alberto ; Horst, Ulrich ; Özgür, Onur. / Rational expectations equilibria of economies with local interactions. In: Journal of Economic Theory. 2006 ; Vol. 127, No. 1. pp. 74-116.
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