Rationalizable expectations

Elchanan Ben-Porath, Aviad Heifetz

Research output: Working paperDiscussion paper


Consider an exchange economy with asymmetric information. What is the set of
outcomes that are consistent with common knowledge of rationality and market clearing? We propose the concept of CKRMC as an answer to this question. The set of price functions that are CKRMC is the maximal set F with the property that every f 2 F deÖnes prices that clear the markets for demands that can be rationalized by some proÖle of subjective beliefs on F: Thus, the di§erence between CKRMC and Rational Expectations Equilibrium (REE) is that CKRMC allows for a situation where the agents do not know the true price function and furthermore may have di§erent beliefs about it. We characterize CKRMC; study its properties, and apply it to a general class of economies with two commodities. CKRMC manifests intuitive properties that stand
in contrast to the full revelation property of REE: In particular, we obtain that for a broad class of economies: (1) There is a whole range of prices that are CKRMC in every state. (2) The set of CKRMC outcomes is monotonic with the amount of information in the economy.
Original languageAmerican English
Place of PublicationJerusalem
PublisherCenter for the Study of Rationality, The Hebrew University of Jerusalem
Number of pages39
StatePublished - Aug 2007


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