An Example of a Dominance Approach to Rational Expectations *

This letter suggests, and describes through an example, a dominance approach to rational expectations as an alternative to the perfect foresight fixed point for closing a model. Dominance criteria have a long history in game theory [see, e.g., Harsanyi (1977, p. 107)]. It also has long been recognized that dominance is not a universally applicable model of behavior [see e.g., Harsanyi (1977, p. 122)]. However, it is argued in Bryant (1982) that under ‘independence’ rational individuals base their decisions upon standard game theoretic vector, or pointwise, dominance. Moreover, ‘independence’ holds if the problems of the relevant other economic agents do not depend upon the decisions of the individual agent in question. To isolate on expectations, this letter treats a simple dynamic model exhibiting such independence. The contribution of this example is to show that the standard game theoretic contraction by dominance procedure can be fruitfully applied to the problem of expectation formation in a dynamic setting.