Toward a Strategic Foundation for Rational Expectations Equilibrium
Econometrica · 2006 · Volume 74 · Issue 5
DOI: 10.1111/j.1468-0262.2006.00703.x
Abstract
A step toward a strategic foundation for rational expectations equilibrium is taken by considering a double auction withnbuyers andmsellers with interdependent values and affiliated private information. If there are sufficiently many buyers and sellers, and their bids are restricted to a sufficiently fine discrete set of prices, then, generically, there is an equilibrium in nondecreasing bidding functions that is arbitrarily close to the unique fully revealing rational expectations equilibrium of the limit market with unrestricted bids and a continuum of agents. In particular, the large double-auction equilibrium is almost efficient and almost fully aggregates the agents' information.
Keywords
Information aggregation, double auction, equilibrium existence, monotone pure strategy, rational expectations
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