Rational expectations in urban economics

Abstract

Canonical analysis of the classical general equilibrium model demonstrates the existence of an open and dense subset of standard economies that possess fully-revealing rational expectations equilibria. This paper shows that the analogous result is not true in urban economies. An open subset of economies where none of the rational expectations equilibria fully reveal private information is found. There are two important pieces. First, there can be information about a location known by a consumer who does not live in that location in equilibrium, and thus the equilibrium rent does not reflect this information. Second, if a consumer's utility depends only on information about their (endogenous) location of residence, perturbations of utility naturally do not incorporate information about other locations conditional on their location of residence. Existence of a rational expectations equilibrium is proved. Space can prevent housing prices from transmitting information from informed to uninformed households, resulting in an inefficient outcome. (JEL Classifications: D51; D82; R13)

Handbook of Creative Cities

“…They typically point to spillover e ects, where locating near other innovating rms and individuals increases the productivity of everybody; the whole is greater than the parts. Others have posited a signalling process, whereby high rents signal to rms and workers that productive, talented workers are located there; a sorting e ect (Berliant and Yu, 2009). Some, as we saw, suggest a premium on certain amenities, like theatres and restaurants (Glaeser et al, 2004).…”

Locational Signaling and Agglomeration

“…In contrast to the aggregate uncertainty discussed in Berliant and Yu (), idiosyncratic uncertainty (individual‐specific information) is the source of asymmetric information in this paper. A model with two regions and two types of workers, with high and low productivity, is analyzed.…”