Revisiting Assumptions in Microeconomic Theory: Preferences, Rationality, and Choice Sets

Abstract

In economic analysis, agents are typically assumed to have stable preferences, full awareness of the true strategic environment in which they operate, and a mathematically compact choice set from which to select their actions. Under these assumptions, agents make decisions to maximize their preferences within the available action space, fully accounting for the strategic environment they face.While these assumptions are normatively appealing, they may lose their realistic relevance in various scenarios. In contrast, the focus of my dissertation is to deviate from these traditional assumptions and provide analytical frameworks in which they are relaxed. By loosening these assumptions, I derive corresponding results that offer a more flexible and realistic understanding of economic behavior.In Chapter 1, we defined a preference representation over consumption streams across different periods. The utility representation incorporates inter-temporal substitution and complementarity effects, allowing for tractable analysis. We present a set of sufficient ax- ioms that preferences satisfy to achieve a non-separable additive representation. By allowing non-separability, the current instantaneous utility can depend on history, which can explain various consumption patterns in reality. In contrast to most history-dependent preference models, which consider only a single commodity or basket of goods, this chapter extends the framework to accommodate N different commodities, providing a richer explanation of the agent’s periodic consumption patterns.Chapter 2 focuses on speculative trading behavior in a discrete infinite setting. The model developed deviates from the rational expectation framework(REE) by assuming market participants are not aware of the true strategic environment instead they make market forecasts by Bayesian updating factor models according to realized historical prices. Throughout the chapter, we define the equilibrium concept under our setting and show its connection with Berk-Nash equilibrium. The existence and convergence result to equilibrium are proved and explained. We also utilize our theoretical framework to explain bubble formation and price momentum & reversal in the financial market.Chapter 3 studies the Legislature Bargaining Process under a closed rule. The question we consider is similar to Baron and Ferejohn (1989). However, in their paper, the proposal space that decision-makers can propose and vote on is compact, which means they are uncountable infinite. In contrast, under our setting, the number of proposals is finite, which aligns more closely with realistic legislative processes. In this chapter, the existence of Nash Equilibrium in our setup is first proved. Then we leverage an example to demonstrate that the equilibrium under our setting is qualitatively different from the one in Baron and Ferejohn (1989). Moreover, theorems that characterize the Nash Equilibrium under majority rule and unanimity rule within our setup are provided and proved.