BOOMS AND SLUMPS IN A GAME OF SEQUENTIAL INVESTMENT WITH THE CHANGING FUNDAMENTALS

Daisuke Oyama

The Japanese Economic Review, 2004, vol. 55, issue 3, 311-320

Abstract: Many less developed countries have experienced prolonged periods of expansions and reversals in foreign investment inflows. This paper presents a simple game‐theoretic model that can explain hysteretic patterns of serial correlation in investment behavior. We develop a sequential move game of coordinated investment played by short‐run players under the changing economic environment and demonstrate that in a unique equilibrium of the game, the economy fluctuates over multiple static equilibria, generating hysteresis.

Date: 2004
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