Information, Interdependence, and Interaction: Where Does the Volatility Come From?
AbstractWe analyze a class of games with interdependent values and linear best responses. The payoff uncertainty is described by a multivariate normal distribution that includes the pure common and pure private value environment as special cases. We characterize the set of joint distributions over actions and states that can arise as Bayes Nash equilibrium distributions under any multivariate normally distributed signals about the payoff states. We characterize maximum aggregate volatility for a given distribution of the payoff states. We show that the maximal aggregate volatility is attained in a noise-free equilibrium in which the agents confound idiosyncratic and common components of the payoff state, and display excess response to the common component. We use a general approach to identify the critical information structures for the Bayes Nash equilibrium via the notion of Bayes correlated equilibrium, as introduced by Bergemann and Morris (2013b).
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Bibliographic InfoPaper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1928.
Length: 56 pages
Date of creation: Dec 2013
Date of revision:
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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA
Other versions of this item:
- Dirk Bergemann & Tibor Heumann & Stephen Morris, 2014. "Information, Interdependence, and Interaction: Where Does the Volatility Come from?," Levine's Working Paper Archive 786969000000000892, David K. Levine.
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-12-15 (All new papers)
- NEP-CTA-2013-12-15 (Contract Theory & Applications)
- NEP-GTH-2013-12-15 (Game Theory)
- NEP-HPE-2013-12-15 (History & Philosophy of Economics)
- NEP-MIC-2013-12-15 (Microeconomics)
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- Jess Benhabib & Pengfei Wang & Yi Wen, 2013.
"Uncertainty and Sentiment-Driven Equilibria,"
NBER Working Papers
18878, National Bureau of Economic Research, Inc.
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