Short Paper

Economic Theory Bulletin

, Volume 1, Issue 1, pp 3-10

First online:

Incentive compatibility of rational expectations equilibrium in large economies: a counterexample

  • Yeneng SunAffiliated withDepartment of Economics, National University of Singapore Email author 
  • , Lei WuAffiliated withJ.P. Morgan
  • , Nicholas C. YannelisAffiliated withDepartment of Economics, Henry B. Tippie College of Business, University of IowaEconomics-School of Social Sciences, The University of Manchester


This note provides a counterexample for a large economy in which a rational expectations equilibrium (REE) does not possess the desirable property of incentive compatibility for each agent. The key point here is that the REE equilibrium price depends on the private information of every individual agent. Thus, we propose to focus on those REE prices that depend only on the macro states and are not influenced by individual agents’ private information. Such a REE will be incentive compatible.


Asymmetric information Rational expectations equilibrium Efficiency Incentive compatibility Fubini extension Exact law of large numbers

JEL Classification

C70 D50 D82