On endogenous formation of price expectations

Journal article: 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.

Author(s)

Cuong Le Van, Paulina Navrouzoglou, Yiannis Vailakis

Journal
  • Games and Economic Behavior
Date of publication
  • 2019
Keywords JEL
D53 D81 D82 D84
Keywords
  • Perfect foresight
  • Price expectations
  • Endogenous borrowing constraints
Pages
  • 436-458
Version
  • 1
Volume
  • 115