Econometrica: Sep 2006, Volume 74, Issue 5

Toward a Strategic Foundation for Rational Expectations Equilibrium
p. 1231-1269

Philip J Reny, Motty Perry

A step toward a strategic foundation for rational expectations equilibrium is taken by considering a double auction with buyers and sellers 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.

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Supplemental Material

Supplement to "Toward a Strategic Foundation for Rational Expectations Equilibrium"

The proof of the main result in Reny and Perry (2006) is provided here. We also provide an example in which the best reply to nondecreasing bidding functions fails to be nondecreasing, and we show how to approximate a degenerate density by one that satis?es the assumptions in Reny and Perry (2006). Finally, we establish that Reny and Perry?s (2006) main result continues to hold when the notion of genericity is changed from the topological notion of residual sets to the measure-motivated notion of prevalent sets.

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