Government policy and the probability of coordination failures
AbstractThis paper introduces an approach to the study of optimal government policy in economies characterized by a coordination problem and multiple equilibria. Such models are often criticized as not being useful for policy analysis because they fail to assign a unique prediction to each possible policy choice. We employ a selection mechanism that assigns, ex ante, a probability to each equilibrium indicating how likely it is to obtain. We show how such a mechanism can be derived as the natural result of an adaptive learning process. This approach leads to a well-defined optimal policy problem, and has important implications for the conduct of government policy. We illustrate these implications using a simple model of technology adoption under network externalities.
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Bibliographic InfoArticle provided by Elsevier in its journal European Economic Review.
Volume (Year): 49 (2005)
Issue (Month): 4 (May)
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Web page: http://www.elsevier.com/locate/eer
Other versions of this item:
- Huberto M. Ennis & Todd Keister, 2003. "Government Policy and the Probability of Coordination Failures," Working Papers 0301, Centro de Investigacion Economica, ITAM.
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