Alternative Representations of Information in Microeconomic Systems

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A natural feature of a microeconomic model which incorporates uncertainty on the parts of the economic agents is the possibility that different agents possess different information. The dynamics of an economic system provides agents with the opportunity for acquiring more information via prices, quantities purchased, and other states of the economic environment. Throughout this process agents form expectations about the future of the system, and make decisions based on those expectations. These expectations might concern future government policy, one's future income, changes in prices and so on. Therefore correctly modeling expectations is crucial to analyzing a wide range of economic phenomena. This project rigorously examines the fundamental structures of information systems to ascertain when rational expectations equilibrium will result in response to changes in the economic variables. The presence of an economic equilibrium implies that expectations are rational. The work studies the costs incurred by the agents of acquiring information, and the potential information content of economic variables such as prices. Also examined is the effect of decentralized decision-making on the attainability of rational expectations equilibrium. %%% The concept of equilibrium, that is a point to which a dynamic system tends to move in response to changes in the system, is central to the analysis of economic as well as physical phenomena. An important aspect of most economic decisions is that they are made in the presence of uncertainty. For instance, consumer decisions to make major purchases like houses or automobiles incorporate expectations about future income, future prices, and the state of the economy. Uncertainty is inherent in such decisions, although present values of economic variables like prices might contain come information about the future. A natural feature of a microeconomic model which incorporates uncertainty on the parts of the economic agents is the possibility that different agents possess different information. The dynamics of an economic system provides agents with the opportunity for acquiring more information via prices, quantities purchased, and other states of the economic environment. Throughout this process agents form expectations about the future of the system, and make decisions based on those expectations. These expectations might concern future government policy, one's future income, changes in prices and so on. Therefore correctly modeling expectations is crucial to analyzing a wide range of economic phenomena. This project studies in a mathematically rigorous way the structures of information and communication among agents in an economic system, and how they act to bring the system to equilibrium.