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Rational expectations and farsighted stability
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Dutta, Bhaskar and Rajiv, Vohra (2017) Rational expectations and farsighted stability. Theoretical Economics, 12 (3). pp. 1191-1227. doi:10.3982/TE2454 ISSN 1933-6837.
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Official URL: http://doi.org/10.3982/TE2454
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. Consequently, when there are multiple continuation paths the farsighted stable set can yield unreasonable predictions. We restrict coalitions to hold common, history independent expectations that incorporate maximality regarding the continuation path. This leads to two related solution 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: | Journal Article | ||||||||
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| Subjects: | H Social Sciences > HB Economic Theory | ||||||||
| Divisions: | Faculty of Social Sciences > Economics | ||||||||
| Library of Congress Subject Headings (LCSH): | Coalitions -- Economic aspects -- Mathematical models | ||||||||
| Journal or Publication Title: | Theoretical Economics | ||||||||
| Publisher: | Econometric Society | ||||||||
| ISSN: | 1933-6837 | ||||||||
| Official Date: | September 2017 | ||||||||
| Dates: |
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| Volume: | 12 | ||||||||
| Number: | 3 | ||||||||
| Page Range: | pp. 1191-1227 | ||||||||
| DOI: | 10.3982/TE2454 | ||||||||
| Status: | Peer Reviewed | ||||||||
| Publication Status: | Published | ||||||||
| Access rights to Published version: | Open Access (Creative Commons) | ||||||||
| Date of first compliant deposit: | 13 October 2016 | ||||||||
| Date of first compliant Open Access: | 28 November 2017 |
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