Information, Interdependence, and Interaction: Where Does the Volatility Come From"

Dirk Bergemann, Tibor Heumann and Stephen Morris

No 1928, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: We analyze a class of games with interdependent values and linear best responses. The payoff uncertainty is described by a multivariate normal distribution that includes the pure common and pure private value environment as special cases. We characterize the set of joint distributions over actions and states that can arise as Bayes Nash equilibrium distributions under any multivariate normally distributed signals about the payoff states. We characterize maximum aggregate volatility for a given distribution of the payoff states. We show that the maximal aggregate volatility is attained in a noise-free equilibrium in which the agents confound idiosyncratic and common components of the payoff state, and display excess response to the common component. We use a general approach to identify the critical information structures for the Bayes Nash equilibrium via the notion of Bayes correlated equilibrium, as introduced by Bergemann and Morris (2013b).

Keywords: Incomplete information; Bayes correlated equilibrium; Volatility; moments restrictions; Linear best responses; Quadratic payoffs (search for similar items in EconPapers)
JEL-codes: C72 C73 D43 D83 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2013-12
New Economics Papers: this item is included in nep-cta, nep-gth, nep-hpe and nep-mic
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Citations: View citations in EconPapers (4)

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Working Paper: Information, Interdependence, and Interaction: Where Does the Volatility Come from? (2014)
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