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On payoff heterogeneity in games with strategic complementarities

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  • Antonio Ciccone

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  • James Costain

Abstract

Payoff heterogeneity weakens positive feedback in binary choice models in two ways. First, heterogeneity drives individuals to corners where they are unaffected by strategic complementarities. Second, aggregate behaviour is smoother than individual behaviour when individuals are heterogeneous. However, this smoothing does not necessarily eliminate positive feedback or guarantee a unique equilibrium. In games with an unbounded, continuous choice space, heterogeneity may either weaken or strengthen positive feedback, depending on a simple convexity/concavity condition. We conclude that positive feedback phenomena derived in representative agent models will often be robust to heterogeneity.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 546.

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Date of creation: Apr 2001
Date of revision: Feb 2002
Handle: RePEc:upf:upfgen:546

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Web page: http://www.econ.upf.edu/

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Keywords: Heterogeneity; multiplicity; discrete choice; strategic complementarity; positive feedback;

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  1. Morris, S & Song Shin, H, 1996. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," Economics Papers 126, Economics Group, Nuffield College, University of Oxford.
  2. Ricardo J. Caballero, 1991. "A Fallacy of Composition," NBER Working Papers 3735, National Bureau of Economic Research, Inc.
  3. Schmutzler, Armin, 1998. "Changing places--the role of heterogeneity and externalities in cumulative processes," International Journal of Industrial Organization, Elsevier, vol. 16(4), pages 445-461, July.
  4. Kneip, Alois, 1999. "Behavioral heterogeneity and structural properties of aggregate demand," Journal of Mathematical Economics, Elsevier, vol. 31(1), pages 49-79, February.
  5. Christophe Chamley, 1999. "Coordinating Regime Switches," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 869-905, August.
  6. Herrendorf, Berthold & Valentinyi, Akos & Waldmann, Robert, 2000. "Ruling Out Multiplicity and Indeterminacy: The Role of Heterogeneity," Review of Economic Studies, Wiley Blackwell, vol. 67(2), pages 295-307, April.
  7. Cooper, Russell & John, Andrew, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, MIT Press, vol. 103(3), pages 441-63, August.
  8. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
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Cited by:
  1. Randolph Luca Bruno, 2006. "Unique Equilibrium in a Model of Rule of Law," LEM Papers Series 2006/16, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  2. Stephen Morris & Hyun Song Shin, 2004. "Heterogeneity and Uniqueness in Interaction Games," Yale School of Management Working Papers ysm341, Yale School of Management.

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