SFB 303 Discussion Paper No. A - 379

Author: Grandmont, Jean-Michel
Title: Aggregation, Learning And Rationality
Abstract: The assumption of individual "rationality" is widely used in economics. The lecture reviews recent studies challenging two aspects of this assumption. The first issue concerns the well known fact that aggregation over optimizing households yields almost anything at the macroeconomic level. By contrast heterogeneity of individual characteristics alone (i.e. with only few individual rationality requirements) may generate strong macroeconomic regularities, with striking consequences for the prevalence in the aggregate of the weak axiom of revealed preference, of gross substitutability, and for uniqueness and stability of the Walrasian exchange equilibrium. In a partial equilibrium context, demand heterogeneity generates concave revenue functions and a unique Cournot oligopoly equilibrium. The second part of the lecture questions the "rational expectations" hypothesis that is widely used in dynamical economic models. Taking into account learning often makes "rational expectations" locally unstable, especially in markets where expectations matter significantly.
Keywords: Rationality, aggregation, heterogeneity, equivalence scales, competitive equilibrium, oligopoly equilibrium, expectations, learning, business cycles.
JEL-Classification-Number: C62, D10, D51, E10, E32, L13
Creation-Date: August 1992
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