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Government policy and the probability of coordination failures

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  • Ennis, Huberto M.
  • Keister, Todd

Abstract

This 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 Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 49 (2005)
Issue (Month): 4 (May)
Pages: 939-973

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Handle: RePEc:eee:eecrev:v:49:y:2005:i:4:p:939-973

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References

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  1. Van Huyck, John B & Battalio, Raymond C & Beil, Richard O, 1991. "Strategic Uncertainty, Equilibrium Selection, and Coordination Failure in Average Opinion Games," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 885-910, August.
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  17. Lucas, Robert E, Jr, 1986. "Adaptive Behavior and Economic Theory," The Journal of Business, University of Chicago Press, vol. 59(4), pages S401-26, October.
  18. Huberto M. Ennis & Todd Keister, 2003. "Aggregate demand management with multiple equilibria," Working Paper 03-04, Federal Reserve Bank of Richmond.
  19. Evans, George W & Honkapohja, Seppo, 1992. "On the Robustness of Bubbles in Linear RE Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(1), pages 1-14, February.
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