Models of sales expectations

Economists modeling firm-decisions generally have to assume that the firms form their expectations according to some hypothesis. Recently it has been fashionable to assume rational expectations, whereas earlier researchers used a variety of simpler models. This paper provides evidence on which of these various theoretical assumptions is ‘best’ by examining which model best explains observed data on manufacturers’ sales expectations. The results suggest that these manufacturers used simple extrapolative or autoregressive models to forecast their sales.