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Rational Expectations and Farsighted Stability

Author

Listed:
  • Dutta, Bhaskar

    (University of Warwick)

  • Vohra, Rajiv

    (Brown University)

Abstract
In the study of farsighted coalitional behavior, a central role is played by the von Neumann-Morgenstern (1944) stable set and its modification that incorporates farsightedness. Such a modification was first proposed by Harsanyi (1974) and has recently been re-formulated by Ray and Vohra (2015). The farsighted stable set is based on a notion of indirect dominance in which an outcome can be dominated by a chain of coalitional ‘moves’ in which each coalition that is involved in the sequence eventually stands to gain. However, it does not require that each coalition make a maximal move, i.e., one that is not Pareto dominated (for the members of the coalition in question) by another. Nor does it restrict coalitions to hold common expectations regarding the continuation path from every state. Consequently, when there are multiple continuation paths the farsighted stable set can yield unreasonable predictions. We resolve this difficulty by requiring all coalitions to have common rational expectations about the transition from one outcome to another. This leads to two related concepts: the rational expectations farsighted stable set (REFS) and the strong rational expectations farsighted stable set (SREFS). We apply these concepts to simple games and to pillage games to illustrate the consequences of imposing rational expectations for farsighted stability.

Suggested Citation

  • Dutta, Bhaskar & Vohra, Rajiv, 2015. "Rational Expectations and Farsighted Stability," CRETA Online Discussion Paper Series 05, Centre for Research in Economic Theory and its Applications CRETA.
  • Handle: RePEc:wrk:wcreta:05
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    References listed on IDEAS

    as
    1. Ray, Debraj, 2007. "A Game-Theoretic Perspective on Coalition Formation," OUP Catalogue, Oxford University Press, number 9780199207954.
    2. Herings, P. Jean-Jacques & Mauleon, Ana & Vannetelbosch, Vincent J., 2004. "Rationalizability for social environments," Games and Economic Behavior, Elsevier, vol. 49(1), pages 135-156, October.
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    7. Jordan, J.S., 2006. "Pillage and property," Journal of Economic Theory, Elsevier, vol. 131(1), pages 26-44, November.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    stable sets ; farsightedness ; consistency ; maximality ; rational expectations ; simple games ; pillage games. JEL Classification Numbers: C71 ; D72 ; D74;
    All these keywords.

    JEL classification:

    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions

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