Strategic mistakes

Joel P. Flynn and Karthik A. Sastry

Journal of Economic Theory, 2023, vol. 212, issue C

Abstract: To study the equilibrium implications of decision frictions, we introduce a new class of control costs in continuum-player, continuum-action games in which agents interact via an aggregate of the actions of others. The costs that we study accommodate a rich class of decision frictions, including ex post misoptimization, imperfect ex ante planning, cognitive constraints that depend endogenously on the behavior of others, and consideration sets. We provide primitive conditions such that equilibria exist, are unique, are efficient, and feature monotone comparative statics for action distributions, aggregates, and the size of agents' mistakes. We apply the model to make robust equilibrium predictions in a monetary business-cycle model of price-setting with planning frictions and a model of consumption and savings during a liquidity trap when endogenous stress worsens decisions.

Keywords: Decision frictions; Equilibrium; Monotone comparative statics; Aggregative games; Stochastic choice; Behavioral macroeconomics (search for similar items in EconPapers)
JEL-codes: D5 D8 E1 E7 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:212:y:2023:i:c:s002205312300100x

DOI: 10.1016/j.jet.2023.105704

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