RATIONALIZABLE EXPECTATIONS AND SUNSPOT EQUILIBRIA IN AN OVERLAPPING-GENERATIONS ECONOMY

There are two theories for the treatment of market uncertainty: ration alizable expectations and sunspot equilibria. This paper shows how the game-theoretic solution concept of rationalizable expectations can be applied to an overlapping-generations exchange economy. Some general properties of these equilibria are discussed. It is shown that rationa lizable-expectations equilibria are the predictions yielded by conside ring sunspot equilibria in which probability beliefs may differ across individuals. This result allows for a new interpretation of sunspot e quilibria and helps to understand their relevance.