Fast Equilibrium Selection by Rational Players Living in a Changing World

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Fast Equilibrium Selection by Rational Players Living in a Changing World

Author Info

Burdzy, Krzysztof
Frankel, David M
Pauzner, Ady

Additional information is available for the following registered author(s):

David M. Frankel

Abstract

We study a coordination game with randomly changing payoffs and small frictions in changing actions. Using only backwards induction, we find that players must coordinate on the risk-dominant equilibrium. More precisely, a continuum of fully rational players are randomly matched to play a symmetric 2 x 2 game. The payoff matrix changes according to a random walk. Players observe these payoffs and the population distribution of actions as they evolve. The game has frictions: opportunities to change strategies arrive from independent random processes, so that the players are locked into their actions for some time. As the frictions disappear, each player ignores what the others are doing and switches at her first opportunity to the risk-dominant action. History dependence emerges in some cases when frictions remain positive.

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Publisher Info
Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 69 (2001)
Issue (Month): 1 (January)
Pages: 163-89
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Handle: RePEc:ecm:emetrp:v:69:y:2001:i:1:p:163-89

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Paper
- Frankel, David M. & Burdzy, Krzysztof & Pauzner, Ady, 2004. "Fast Equilibrium Selection by Rational Players Living in a Changing World," Staff General Research Papers 11923, Iowa State University, Department of Economics.

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Jakub Steiner, 2006. "Coordination Cycles," ESE Discussion Papers 162, Edinburgh School of Economics, University of Edinburgh. [Downloadable!]
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