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Fast Equilibrium Selection by Rational Players Living in a Changing World

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  • Frankel, David M.
  • Burdzy, Krzysztof
  • Pauzner, Ady

Abstract

We study a coordination game with randomly changing payoffs and small frictions in changing actions. Using only backwards induction, we find that players must coordinate on the risk-dominant equilibrium. More precisely, a continuum of fully rational players are randomly matched to play a symmetric 2 x 2 game. The payoff matrix changes according to a random walk. Players observe these payoffs and the population distribution of actions as they evolve. The game has frictions: opportunities to change strategies arrive from independent random processes, so that the players are locked into their actions for some time. As the frictions disappear, each player ignores what the others are doing and switches at her first opportunity to the risk-dominant action. History dependence emerges in some cases when frictions remain positive.

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Bibliographic Info

Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 11923.

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Date of creation: 01 Jan 2001
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Publication status: Published in Econometrica 2001,, pp. 163-190
Handle: RePEc:isu:genres:11923

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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
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Web page: http://www.econ.iastate.edu
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