Faculty of Economics and Business Administration Publications Database

Decision Making in the Presence of Heterogeneous Information and Social Interactions

Pesaran, M. Hashem
Volume: 39
Number: 4
Pages: 1027 - 1052
Month: November
ISSN-Print: 0020-6598
Link External Source: Online Version
Year: 1998
Keywords: Economics; Decision making
Abstract: The authors consider the solution of multivariate linear rational expectations models in the presence of heterogeneous information and social interactions. To overcome the ''infinite regress in expectations'' problem that arises in the solution of these models, we assume that agents'' expectations about the decisions and expectations of other agents are based solely on public information. They show that the resulting solutions satisfy the key postulates of the rational expectations hypothesis, but can nevertheless exhibit dynamic properties quite different from those under homogeneous information. The authors illustrate this by analyzing a model of firms'' optimal factor demand decisions. In this model, the presence of information heterogeneity may accentuate the propagation effects of external shocks on firms'' factor demands.