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LEARNING FROM THE EXPECTATIONS OF OTHERS

Published online by Cambridge University Press:  01 June 2008

JIM GRANATO ,
ERAN A. GUSE  and
M. C. SUNNY WONG
JIM GRANATO
Affiliation:
University of Houston
ERAN A. GUSE
Affiliation:
University of Cambridge
M. C. SUNNY WONG*
Affiliation:
University of San Francisco
*
Address correspondence to: M. C. Sunny Wong, Department of Economics, University of San Francisco, 2130 Fulton Street, San Francisco, CA 94121, USA; e-mail: mwong11@usfca.edu.
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Abstract

This paper explores the equilibrium properties of boundedly rational heterogeneous agents under adaptive learning. In a modified cobweb model with a Stackelberg framework, there is an asymmetric information diffusion process from leading to following firms. It turns out that the conditions for at least one learnable equilibrium are similar to those under homogeneous expectations. However, the introduction of information diffusion leads to the possibility of multiple equilibria and can expand the parameter space of potential learnable equilibria. In addition, the inability to correctly interpret expectations will cause a “boomerang effect” on the forecasts and forecast efficiency of the leading firms. The leading firms' mean square forecast error can be larger than that of following firms if the proportion of following firms is sufficiently large.

Keywords

Adaptive LearningExpectational StabilityInformation DiffusionCobweb ModelHeterogeneous Expectations
Type
Articles
Information
Macroeconomic Dynamics , Volume 12 , Issue 3 , June 2008 , pp. 345 - 377
Copyright
Copyright © Cambridge University Press 2008

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