Payoff Shocks and Equilibrium Selection with Endogenous Flexibility
In dynamic models with multiple equilibria, a central question is how agents coordinate their expectations on a particular outcome. Many dynamic models feature endogenous flexibility: at some cost, agents can adjust their behavior more quickly (e.g., in response to changing market conditions). We show that aggregate payoff shocks eliminate all equilibria but one in a general dynamic setting with endogenous flexibility. The results are applied to a model of development.
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|Date of creation:||2001|
|Contact details of provider:|| Postal: Israel TEL-AVIV UNIVERSITY, THE FOERDER INSTITUTE FOR ECONOMIC RESEARCH, RAMAT AVIV 69 978 TEL AVIV ISRAEL.|
Web page: http://econ.tau.ac.il/foerder/about
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