Rationalizability, Strong Rationality and Expectational Stability (Now published in Games and Economic Behavior, Special Issue on Learning Dynamics, vol.5 (Oct. 1993), pp.632-646).)

Evans, George W.; Guesnerie, Roger

Rationalizability, Strong Rationality and Expectational Stability (Now published in Games and Economic Behavior, Special Issue on Learning Dynamics, vol.5 (Oct. 1993), pp.632-646).)

Published 1992

We examine the connection between two stability concepts of rational expectations equilibria: expectational stability, based on the convergence of iterations of expectations, and strong rationality, based on uniqueness of the rationalizable solutions of an associated game with restrictions on beliefs. To compare the concepts we start from a simple class of linear models with a unique rational expectations equilibrium and imbed it in a game-theoretic framework for which it appears as a linearized aggregate reduced form. It is shown that the two stability concepts coincide when agents are homgeneous. For the general case of heterogeneous agents we show that expectational stability is a necessary condition for strong rationality and we provide a sufficient condition for the latter.