Learning and Convergence to a Full-Information Equilibrium are not Equivalent

Byoung Heon Jun, Xavier Vives

Research output: Contribution to journalArticle

8 Citations (Scopus)

Abstract

Convergence to a full-information equilibrium (FIE) in the presence of persistent shocks and asymmetric information about an unknown payoff-relevant parameter θ is established in a classical infinite-horizon partial equilibrium linear model. It is found that, under the usual stability assumptions on the autoregressive process of shocks, convergence occurs at the rate n-1/2, where n is the number of rounds of trade, and that the asymptotic variance of the discrepancy of the full-information price and the market price is independent of the degree of autocorrelation of the shocks. This is so even though the speed of learning θ from prices becomes arbitrarily slow as autocorrelation approaches a unit root level. It follows then that learning the unknown parameter θ and convergence of the equilibrium process to the FIE are not equivalent. Moreover, allowing for non-stationary processes of shocks, the distinction takes a more stark form. Learning θ is neither necessary nor sufficient for convergence to the FIE. When the process of shocks has a unit root, convergence to the FIE occurs but θ can not be learned. When the process is sufficiently explosive and there is a positive mass of perfectly informed agents, θ is learned quickly but convergence to the FIE does not occur.

Original languageEnglish
Pages (from-to)653-674
Number of pages22
JournalReview of Economic Studies
Volume63
Issue number4
Publication statusPublished - 1996 Dec 1

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Unit root
Autocorrelation
Autoregressive process
Nonstationary processes
Asymmetric information
Infinite horizon
Market price
Discrepancy
Partial equilibrium
Asymptotic variance

ASJC Scopus subject areas

  • Economics and Econometrics

Cite this

Learning and Convergence to a Full-Information Equilibrium are not Equivalent. / Jun, Byoung Heon; Vives, Xavier.

In: Review of Economic Studies, Vol. 63, No. 4, 01.12.1996, p. 653-674.

Research output: Contribution to journalArticle

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