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Toward a Strategic Foundation for Rational Expectations Equilibrium
Author(s) -
Reny Philip J,
Perry Motty
Publication year - 2006
Publication title -
econometrica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 16.7
H-Index - 199
eISSN - 1468-0262
pISSN - 0012-9682
DOI - 10.1111/j.1468-0262.2006.00703.x
Subject(s) - foundation (evidence) , economics , mathematical economics , rational expectations , microeconomics , keynesian economics , neoclassical economics , political science , law
A step toward a strategic foundation for rational expectations equilibrium is taken by considering a double auction with n buyers and m sellers with interdependent values and affiliated private information. If there are sufficiently many buyers and sellers, and their bids are restricted to a sufficiently fine discrete set of prices, then, generically, there is an equilibrium in nondecreasing bidding functions that is arbitrarily close to the unique fully revealing rational expectations equilibrium of the limit market with unrestricted bids and a continuum of agents. In particular, the large double‐auction equilibrium is almost efficient and almost fully aggregates the agents' information.