Payoff Shocks and Equilibrium Selection with Endogenous Flexibility

David Frankel

Working Papers from Tel Aviv

Abstract: 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.

Keywords: GAMES; MACROECONOMICS; ECONOMIC DEVELOPMENT (search for similar items in EconPapers)
JEL-codes: C73 O11 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2001
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Persistent link: https://EconPapers.repec.org/RePEc:fth:teavfo:2001-9

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