Uncertainty and disagreement in equilibrium models

Nabil I. Al-Najjar, Eran Shmaya

Research output: Contribution to journalArticlepeer-review

4 Scopus citations

Abstract

Leading equilibrium concepts require agents’ beliefs to coincide with themodel’s true probabilities and thus be free of systematic errors. This implicitly assumes a criterion that tests beliefs against the observed outcomes generated by the model. We formalize this requirement in stationary environments. We show that there is a tension between requiring that beliefs can be tested against systematic errors and allowing agents to disagree or be uncertain about the long-run fundamentals. We discuss the application of our analysis to asset pricing, Markov perfect equilibria, and dynamic games.

Original languageEnglish (US)
Pages (from-to)778-808
Number of pages31
JournalJournal of Political Economy
Volume123
Issue number4
DOIs
StatePublished - Aug 1 2015

ASJC Scopus subject areas

  • Economics and Econometrics

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