Are beliefs as indeterminate as suggested by models with multiple equilibria? Multiplicity of equilibria arises largely as the unintended consequence of two modeling assumptions-the fundamentals are assumed to be common knowledge, and economic agents know others' actions in equilibrium. Both are questionable. When others' actions are not known with certainty (as when actions rely on noisy signals), self-fulfilling beliefs lead to a unique outcome determined by the fundamentals and the knowledge that others are rational. This paper illustrates this approach in the context of a model of bank runs and other similar applications. Such an approach places comparative statics and policy analyses on a firmer footing. It also suggests that public information has a disproportionately larger influence on the outcome than private information.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics