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COORDINATION ON SADDLE-PATH SOLUTIONS: THE EDUCTIVE VIEWPOINT—LINEAR UNIVARIATE MODELS

Published online by Cambridge University Press:  07 January 2003

George W. Evans  and
Roger Guesnerie
George W. Evans
Affiliation:
University of Oregon
Roger Guesnerie
Affiliation:
DELTA and Collège de France
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Abstract

We investigate local strong rationality (LSR) in a one-step-forward-looking univariate model with memory one. Eductive arguments are used to determine when common knowledge (CK) that the solution is near some perfect-foresight path is sufficient to trigger complete coordination on that path (i.e., the path is LSR). Coordination of expectations is shown to depend on three factors: the nature of the CK initial beliefs, the degree of structural heterogeneity, and the information structure. Our sufficient conditions for LSR precisely reflect these features and provide basic consistent justifications for the choice of the saddle-path solution.

Keywords

Eductive StabilityCoordinationHeterogeneityStrong Rationality
Type
Research Article
Information
Macroeconomic Dynamics , Volume 7 , Issue 1 , February 2003 , pp. 42 - 62
Copyright
© 2003 Cambridge University Press

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