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Non-Laplacian Beliefs in a Global Game with Noisy Signaling

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  • Chris Edmond

Abstract

In standard global games, individual behavior is optimal if it constitutes a best response to agnostic - Laplacian - beliefs about the aggregate behavior of other agents. This paper considers a standard binary action global game augmented with noisy signaling by an informed policy-maker and shows that in this game, equilibrium beliefs depart in quite stark ways from the Laplacian benchmark. In the limit as signals become arbitrarily precise, so that all fundamental uncertainty is removed (leaving only strategic uncertainty), the equilibrium beliefs of the marginal individual concerning the aggregate action collapse to a discrete binomial distribution, giving probability mass only to the polar extreme outcomes. By contrast in the underlying standard global game the marginal individual believes the aggregate action has a continuous uniform distribution, giving equal likelihood to all possible outcomes.

Suggested Citation

  • Chris Edmond, 2013. "Non-Laplacian Beliefs in a Global Game with Noisy Signaling," Department of Economics - Working Papers Series 1171, The University of Melbourne.
  • Handle: RePEc:mlb:wpaper:1171
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    File URL: http://fbe.unimelb.edu.au/__data/assets/pdf_file/0009/796968/1171.pdf
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    More about this item

    Keywords

    coordination; signalling; bias; strategic uncertainty; noise;

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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