Chapter 4: General Equilibrium, Co-ordination and Multiplicity on Spot Markets
Roger Guesnerie 4.1 INTRODUCTION Before embarking on our main argument, we should point out that any economic or social theory based on the assumption that individuals enjoy a degree of autonomy must explain both their motivation and their cognitive representations of the world. Economic theory often postulates the rationality of motives, to which it associates preferences described through utility functions. Representations or beliefs in this context take the form of expectations, a functional reduction that comes naturally into general equilibrium theory, the subject to which this contribution is mainly devoted. The world of static general equilibrium may be imaginary but it is a world whose understanding has proved surprisingly instructive in deciphering the complexity of interactions between real markets. In this world, the only information affecting agents’ decisions, apart from any private information they may have, is embodied in equilibrium prices, supposing that the mechanisms leading to their realization are in place. In a sequential context, the relevant beliefs concern future prices. Such beliefs on future prices are captured in formal models by estimates in the form of probabilistic expectations. In this context, a reﬂection on beliefs is therefore tantamount to a reﬂection on price expectations. The objective of this chapter is not to present an exhaustive retrospective of the history of research on expectations in Walrasian general equilibrium models. While attempting to sketch out a general overview, what follows touches upon certain aspects of this history, focusing on ﬁnite horizon general equilibrium models and stressing the dif...
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