Self-fulfilling mechanisms and rational expectations

We introduce a class of communication equilibria, which we call self-fulfilling mechanisms, and show that they provide a game-theoretic foundation to rational expectations equilibria. Let E be an exchange economy with differential information. We associate a strategic market game Gamma(E) with E. We prove thai the allocations achieved through a self-fulfilling mechanism in Gamma(E) coincide with the rational expectations equilibrium allocations in E. In order to understand how self-fulfilment can be realized in a dynamic framework, we investigate the relationship between self-fulfilling mechanisms in Gamma(E) and Nash equilibria of the T-stage repeated game Gamma(T)(E). (C) 1997 Academic Press.