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A Global Game with Heterogenous Priors

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  • Wolfgang Kuhle
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    Abstract

    This paper relaxes the common prior assumption in the public and private information game of Morris and Shin (2000, 2004). For the generalized game, where the agent's prior expectations are heterogenous, it derives a sharp condition for the emergence of unique/multiple equilibria. This condition indicates that unique equilibria are played if player's public disagreement is substantial. If disagreement is small, equilibrium multiplicity depends on the relative precisions of private signals and subjective priors. Extensions to environments with public signals of exogenous and endogenous quality show that prior heterogeneity, unlike heterogeneity in private information, provides a robust anchor for unique equilibria. Finally, irrespective of whether priors are common or not, we show that public signals can ensure equilibrium uniqueness, rather than multiplicity, if they are sufficiently precise.

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    File URL: http://arxiv.org/pdf/1312.7860
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    Paper provided by arXiv.org in its series Papers with number 1312.7860.

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    Date of creation: Dec 2013
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    Handle: RePEc:arx:papers:1312.7860

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    1. Sergei Izmalkov & Muhamet Yildiz, 2009. "Investor Sentiments," Working Papers w0138, Center for Economic and Financial Research (CEFIR).
    2. Carlsson, H. & Damme, E.E.C. van, 1993. "Global games and equilibrium selection," Open Access publications from Tilburg University urn:nbn:nl:ui:12-154416, Tilburg University.
    3. Dasgupta, Amil, 2007. "Coordination and delay in global games," Journal of Economic Theory, Elsevier, Elsevier, vol. 134(1), pages 195-225, May.
    4. George-Marios Angeletos & Ivan Werning, 2004. "Crises and Prices: Information Aggregation, Multiplicity and Volatility," NBER Working Papers 11015, National Bureau of Economic Research, Inc.
    5. Mathevet, Laurent, 2012. "Beliefs and rationalizability in games with complementarities," MPRA Paper 36032, University Library of Munich, Germany.
    6. Steiner, Jakub & Stewart, Colin, 2008. "Contagion through learning," Theoretical Economics, Econometric Society, Econometric Society, vol. 3(4), December.
    7. Rubinstein, Ariel, 1989. "The Electronic Mail Game: Strategic Behavior under "Almost Common Knowledge."," American Economic Review, American Economic Association, American Economic Association, vol. 79(3), pages 385-91, June.
    8. Stephen Morris & Hyun Song Shin, 2001. "Coordination risk and the price of debt," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 25046, London School of Economics and Political Science, LSE Library.
    9. Rajiv Sethi & Muhamet Yildiz, 2009. "Public Disagreement," Economics Working Papers, Institute for Advanced Study, School of Social Science 0089, Institute for Advanced Study, School of Social Science.
    10. Morris, Stephen, 1995. "The Common Prior Assumption in Economic Theory," Economics and Philosophy, Cambridge University Press, vol. 11(02), pages 227-253, October.
    11. Hellwig, Martin F., 1980. "On the aggregation of information in competitive markets," Journal of Economic Theory, Elsevier, Elsevier, vol. 22(3), pages 477-498, June.
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