, Volume 1, Issue 1, pp 3-10

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

Abstract

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.