Dutta, Bhaskar and Vohra, Rajiv (2015) Rational expectations and farsighted stability. Working Paper. Coventry: University of Warwick. Department of Economics. Warwick economics research papers series (WERPS) (1090). (Unpublished)

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Abstract

In the study of farsighted coalitional behavior, a central role is played by the von Neumann-Morgenstern (1944) stable set and its modification that incorporates farsightedness. Such a modification was first proposed by Harsanyi (1974) and has recently been re-formulated by Ray and Vohra (2015). The farsighted stable set is based on a notion of indirect dominance in which an outcome can be dominated by a chain of coalitional ‘moves’ in which each coalition that is involved in the sequence eventually stands to gain. However, it does not require that each coalition make a maximal move, i.e., one that is not Pareto dominated (for the members of the coalition in question) by another. Nor does it restrict coalitions to hold common expectations regarding the continuation path from every state. Consequently, when there are multiple continuation paths the farsighted stable set can yield unreasonable predictions. We resolve this difficulty by requiring all coalitions to have common rational expectations about the transition from one outcome to another. This leads to two related concepts: the rational expectations farsighted stable set (REFS) and the strong rational expectations farsighted stable set (SREFS). We apply these concepts to simple games and to pillage games to illustrate the consequences of imposing rational expectations for farsighted stability

Item Type:	Working or Discussion Paper (Working Paper)
Alternative Title:
Subjects:	H Social Sciences > HB Economic Theory
Divisions:	Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	Rational expectations (Economic theory)
Series Name:	Warwick economics research papers series (WERPS)
Publisher:	University of Warwick. Department of Economics
Place of Publication:	Coventry
ISSN:	0083-7350
Official Date:	December 2015
Dates:	Date Event December 2015 Published
Number:	1090
Number of Pages:	28
Institution:	University of Warwick
Status:	Not Peer Reviewed
Publication Status:	Unpublished
Access rights to Published version:	Restricted or Subscription Access

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