econometric issues in the presence of multiple equilibria
AbstractMultiplicity of equilibria implies that the relationship between the outcome variable and the exogenous variables characterising a model is a correspondence rather than a function. This results in an incomplete econometric model. Incompleteness complicates identification and statistical inference on functionals of the probability distribution of the population of interest. This is because it implies that the sampling process and the maintained assumptions may be consistent with a set of values for these functionals, rather than with a single one. As a result, the econometric analysis of models with multiple equilibria needs to either: (1) rely on simplifying assumptions that shift focus to outcome features that are common across equilibria; or (2) augment the model with a â€œselection mechanismâ€ that chooses the equilibrium played in the regions of multiplicity; or (3) maintain only minimal assumptions that partially identify the functionals of interest. Each of these approaches is reviewed, focusing on static game theoretic models.
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This chapter was published in: Steven N. Durlauf & Lawrence E. Blume (ed.) , , pages , 2010, 4th quarter update.
This item is provided by Palgrave Macmillan in its series The New Palgrave Dictionary of Economics with number v:4:year:2010:doi:3836.
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