Stackelberg solution for a two-agent rational expectations model

Juanjuan Xu, Huanshui Zhang, Tamer Başar

Research output: Contribution to journalArticlepeer-review

Abstract

In this paper, we derive the Stackelberg solution associated with a leader–follower rational expectations model. By solving the dynamic rational expectations optimization problem subject to forward and backward stochastic difference equations (FBSDEs), we obtain the Stackelberg strategy of the leader with an adapted open-loop information structure, in terms of the FBSDEs. Furthermore, we solve the associated FBSDEs by establishing a nonhomogeneous relationship between backward and forward stochastic processes. This leads to an explicit form of the Stackelberg strategy of the leader.

Original languageEnglish (US)
Article number109601
JournalAutomatica
Volume129
DOIs
StatePublished - Jul 2021

Keywords

  • FBSDEs
  • Rational expectations model
  • Stackelberg solution

ASJC Scopus subject areas

  • Control and Systems Engineering
  • Electrical and Electronic Engineering

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