Formation of Rationally Heterogeneous Expectations
CentER Discussion Paper Series No. 2012-083
39 Pages Posted: 22 Oct 2012
Date Written: October 22, 2012
This paper models expectation formation by taking into account that agents produce heterogeneous expectations due to model uncertainty, informational frictions and different capacities for processing information. We show that there are two general classes of steady states within this framework: those where strictly dominated forecasting rules vanish, and intrinsic heterogeneous steady states where a positive proportion of agents use a more costly perfect foresight. This demonstrates that intrinsic heterogeneity can also arise in a model where the forecasting rules are not equally costly, and do not exhibit identical performance in the long run.
Keywords: heterogeneous expectations, cobweb model, adaptive learning, rational expectations
JEL Classification: C62, D83, D84, E30
Suggested Citation: Suggested Citation