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A Note on Equilibrium Selection in Polya-Urn Coordination Games

  • Giorgio Fagiolo

    ()

    (Department of Economics, University of Verona, Verona (Italy) and Laboratory of Economics and Management, Sant'Anna School of Advanced Studies, Pisa (Italy).)

We study equilibrium selection in coordination games played by a population of agents whose size increases over time. We assume that, in each time period, a new player enters the economy, observes current strategy shares and irreversibly chooses a strategy on the basis of expected payoffs. We employ a simple Polya-Urn scheme to discuss the efficiency of long-run equilibria under alternative individual decision rules (e.g. best-reply, logit, etc.). We show that the system delivers a predictable outcome only when agents employ either a linear or a logit probability rule. If agents employ deterministic best-reply rules, Pareto-efficient coordination can occur, but the actual outcome depends on initial conditions and chance. In all other cases, coexistence of strategies characterizes equilibrium configurations. Finally, we discuss our findings in the framework of technological adoption models.

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Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 3 (2005)
Issue (Month): 45 ()
Pages: 1-14

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Handle: RePEc:ebl:ecbull:eb-05c70028
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  7. Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-41, August.
  8. Sanjeev Goyal & Fernando Vega-Redondo, 2003. "Network Formation and Social Coordination," Working Papers 481, Queen Mary University of London, School of Economics and Finance.
  9. Ellison, Glenn, 1993. "Learning, Local Interaction, and Coordination," Econometrica, Econometric Society, vol. 61(5), pages 1047-71, September.
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  11. Kandori, M. & Mailath, G.J., 1991. "Learning, Mutation, And Long Run Equilibria In Games," Papers 71, Princeton, Woodrow Wilson School - John M. Olin Program.
  12. Brian Arthur, W. & Ermoliev, Yu. M. & Kaniovski, Yu. M., 1987. "Path-dependent processes and the emergence of macro-structure," European Journal of Operational Research, Elsevier, vol. 30(3), pages 294-303, June.
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