Rational responses and rational conjectures (Q1072915)

General equilibrium fixed-price models provide some insight into the problems of quantity constrained equilibria, but a convincing explanation for the price rigidity is lacking. \textit{F. Hahn} [Rev. Econ. Stud. 45, 1- 17 (1978; Zbl 0422.90017)] presents a pure exchange model with endogenous prices that generates some of the results of the fixed-price literature. This paper utilizes Hahn's model and discusses the rationality problem arising from the fact that agents have to make conjectures about the markets to set prices optimally. The objective is to show that there may be inefficient allocations with the agents behaving rationally. In the same context Hahn proposed a notion of rationality under which the existence results obtained were negative. This paper argues that Hahn's is a strong notion of rationality that requires the mechanism to be incentive compatible. An alternative notion that refers exclusively to the rationality of the conjectures is proposed, and positive results on existence obtained.