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Strategic mistakes

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  • Flynn, Joel P.
  • Sastry, Karthik A.

Abstract

To study the equilibrium implications of decision frictions, we introduce a new class of control costs in continuum-player, continuum-action games in which agents interact via an aggregate of the actions of others. The costs that we study accommodate a rich class of decision frictions, including ex post misoptimization, imperfect ex ante planning, cognitive constraints that depend endogenously on the behavior of others, and consideration sets. We provide primitive conditions such that equilibria exist, are unique, are efficient, and feature monotone comparative statics for action distributions, aggregates, and the size of agents' mistakes. We apply the model to make robust equilibrium predictions in a monetary business-cycle model of price-setting with planning frictions and a model of consumption and savings during a liquidity trap when endogenous stress worsens decisions.

Suggested Citation

  • Flynn, Joel P. & Sastry, Karthik A., 2023. "Strategic mistakes," Journal of Economic Theory, Elsevier, vol. 212(C).
    • Handle: RePEc:eee:jetheo:v:212:y:2023:i:c:s002205312300100x
    DOI: 10.1016/j.jet.2023.105704
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    More about this item

    Keywords

    Decision frictions; Equilibrium; Monotone comparative statics; Aggregative games; Stochastic choice; Behavioral macroeconomics;
    All these keywords.

    JEL classification:

    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E7 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics

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