On endogenous formation of price expectations

Le Van, C., Navrouzoglou, P. and Vailakis, Y. (2019) On endogenous formation of price expectations. Games and Economic Behavior, 115, pp. 436-458. (doi: 10.1016/j.geb.2019.03.004)

Abstract

We study a two-period exchange economy with complete financial markets and endogenous borrowing constraints. Contrary to perfect foresight paradigm, we assume that agents are heterogeneous in their ability to forecast future prices. We introduce a new equilibrium concept, called informationally constrained equilibrium, where the formation of price expectations is endogenous and reflects the revelation of information from observing bounds on liabilities designed to ensure solvency at any contingency. We prove that, under standard assumptions, an equilibrium always exists and we characterize the degree of information revealed by the endogenous debt limits.

• Item Type: Articles
• Additional Information: Yiannis Vailakis acknowledges the financial support of an ERC starting grant (FP7, Ideas specific program, Project 240983 DCFM) and of two ANR research grants (Projects Novo Tempus and FIRE).
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Vailakis, Professor Yiannis and Navrouzoglou, Dr Paulina
• Authors: Le Van, C., Navrouzoglou, P., and Vailakis, Y.
• College/School: College of Social Sciences > Adam Smith Business School > Economics
• Journal Name: Games and Economic Behavior
• Publisher: Elsevier
• ISSN: 0899-8256
• ISSN (Online): 1090-2473
• Published Online: 28 March 2019
• Copyright Holders: Copyright © 2019 Elsevier Inc.
• First Published: First published in Games and Economic Behavior 115:436-458
• Publisher Policy: Reproduced in accordance with the copyright policy of the publisher