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A Global Game with Heterogenous Priors

  • Wolfgang Kuhle
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    This paper relaxes the common prior assumption in the public and private information game of Morris and Shin (2000, 2004). For the generalized game, where the agent's prior expectations are heterogenous, it derives a sharp condition for the emergence of unique/multiple equilibria. This condition indicates that unique equilibria are played if player's public disagreement is substantial. If disagreement is small, equilibrium multiplicity depends on the relative precisions of private signals and subjective priors. Extensions to environments with public signals of exogenous and endogenous quality show that prior heterogeneity, unlike heterogeneity in private information, provides a robust anchor for unique equilibria. Finally, irrespective of whether priors are common or not, we show that public signals can ensure equilibrium uniqueness, rather than multiplicity, if they are sufficiently precise.

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    File URL: http://arxiv.org/pdf/1312.7860
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    Paper provided by arXiv.org in its series Papers with number 1312.7860.

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    Date of creation: Dec 2013
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    Handle: RePEc:arx:papers:1312.7860
    Contact details of provider: Web page: http://arxiv.org/

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    1. Rajiv Sethi & Muhamet Yildiz, 2012. "Public Disagreement," American Economic Journal: Microeconomics, American Economic Association, vol. 4(3), pages 57-95, August.
    2. Carlsson, Hans & van Damme, Eric, 1993. "Global Games and Equilibrium Selection," Econometrica, Econometric Society, vol. 61(5), pages 989-1018, September.
    3. Hyun Song Shin & Stephen Morris, 2001. "Coordination Risk and the Price of Debt," FMG Discussion Papers dp373, Financial Markets Group.
    4. George-Marios Angeletos & Ivan Werning, 2004. "Crises and Prices: Information Aggregation, Multiplicity and Volatility," NBER Working Papers 11015, National Bureau of Economic Research, Inc.
    5. Jakub Steiner & Colin Stewart, 2006. "Contagion through Learning," ESE Discussion Papers 151, Edinburgh School of Economics, University of Edinburgh, revised 10 Aug 2007.
    6. Morris, Stephen, 1995. "The Common Prior Assumption in Economic Theory," Economics and Philosophy, Cambridge University Press, vol. 11(02), pages 227-253, October.
    7. Mathevet, Laurent, 2012. "Beliefs and rationalizability in games with complementarities," MPRA Paper 36032, University Library of Munich, Germany.
    8. Rubinstein, Ariel, 1989. "The Electronic Mail Game: Strategic Behavior under "Almost Common Knowledge."," American Economic Review, American Economic Association, vol. 79(3), pages 385-91, June.
    9. Sergei Izmalkov & Muhamet Yildiz, 2009. "Investor Sentiments," Working Papers w0138, Center for Economic and Financial Research (CEFIR).
    10. Dasgupta, Amil, 2007. "Coordination and delay in global games," Journal of Economic Theory, Elsevier, vol. 134(1), pages 195-225, May.
    11. Hellwig, Martin F., 1980. "On the aggregation of information in competitive markets," Journal of Economic Theory, Elsevier, vol. 22(3), pages 477-498, June.
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