Non-robustness of some economic models

In: Topics in theoretical economics, Band 3, Heft 1

Abstract

This paper considers the robustness of optimal decisions in a model of monopoly and a model of competitive equilibrium in a securities market. Robustness, defined as payoffs being continuous with respect to perturbations in the underlying model, fails to hold for either model. Decision rules are made robust by appropriately "smoothing" the problem, and by decreasing the weight given to small details of belief that can cause large changes in optimal payoffs.