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Government policy and the probability of coordination failures

  • Ennis, Huberto M.
  • Keister, Todd

This paper introduces an approach to the study of optimal government policy in economies characterized by a coordination problem and multiple equilibria. Such models are often criticized as not being useful for policy analysis because they fail to assign a unique prediction to each possible policy choice. We employ a selection mechanism that assigns, ex ante, a probability to each equilibrium indicating how likely it is to obtain. We show how such a mechanism can be derived as the natural result of an adaptive learning process. This approach leads to a well-defined optimal policy problem, and has important implications for the conduct of government policy. We illustrate these implications using a simple model of technology adoption under network externalities.

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 49 (2005)
Issue (Month): 4 (May)
Pages: 939-973

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Handle: RePEc:eee:eecrev:v:49:y:2005:i:4:p:939-973
Contact details of provider: Web page: http://www.elsevier.com/locate/eer

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