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Coordination Failures under Incomplete Information and Global Games

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  • Kyoji Fukao

Abstract

Carlsson and van Damme (1991, 93) presented a notion of a global game, which is an incomplete information game where the actual payoff structure is affected by a realization of a common shock and where each player gets noisy private information of the shock. For n -person symmetric games with two possible actions characterized by strategic complementarity, they showed that equilibrium play in a global game with vanishing noise is uniquely determined. The concept of global games is important not only as a theory of the most refined notion of equilibrium but also as a theory of coordination failures under private information. From this viewpoint, this paper makes the theory of global games more general and more applicable to such problems. The implications of the theory of global games are investigated in two specific models: a peculative attack model and a network externality model. It is shown that both the monetary authority in the speculative attack model and the central planner in the network externality model will prefer the equilibrium in a global game with small noise to the worst equilibrium in the corresponding complete information game. Therefore, they will welcome the existence of small noise, if they apply mini-max principle to multiple equilibrium problems.

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Bibliographic Info

Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 03006.

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Length: 26 pages
Date of creation: Feb 2003
Date of revision:
Handle: RePEc:eti:dpaper:03006

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  1. Carlsson, Hans & van Damme, Eric, 1993. "Global Games and Equilibrium Selection," Econometrica, Econometric Society, vol. 61(5), pages 989-1018, September.
  2. John C. Harsanyi & Reinhard Selten, 1988. "A General Theory of Equilibrium Selection in Games," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262582384, January.
  3. E. Kohlberg & J.-F. Mertens, 1998. "On the Strategic Stability of Equilibria," Levine's Working Paper Archive 445, David K. Levine.
  4. Van Damme, E., 1991. "Equilibrium Selection in 2 x 2 Games," Papers 9108, Tilburg - Center for Economic Research.
  5. Bhattacharya, Utpal & Weller, Paul, 1997. "The advantage to hiding one's hand: Speculation and central bank intervention in the foreign exchange market," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 251-277, July.
  6. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  7. Paul Milgrom & Robert Weber, 1981. "Distributional Strategies for Games with Incomplete Information," Discussion Papers 428R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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Cited by:
  1. Sbracia, M. & Zaghini, A., 2000. "Expectations and Information in Second Generation Currency Crises Models," Papers 391, Banca Italia - Servizio di Studi.
  2. Stephen Morris & Hyun Song Shin, 2000. "Global Games: Theory and Applications," Cowles Foundation Discussion Papers 1275R, Cowles Foundation for Research in Economics, Yale University, revised Aug 2001.
  3. Heinemann, Frank & Illing, Gerhard, 2002. "Speculative attacks: unique equilibrium and transparency," Journal of International Economics, Elsevier, vol. 58(2), pages 429-450, December.

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