Fast Equilibrium Selection by Rational Players Living in a Changing World

David Frankel, Krzysztof Burdzy and Ady Pauzner

Staff General Research Papers Archive from Iowa State University, Department of Economics

Abstract: We study a coordination game with randomly changing payoffs and small frictions in changing actions. Using only backwards induction, we find that players must coordinate on the risk-dominant equilibrium. More precisely, a continuum of fully rational players are randomly matched to play a symmetric 2 x 2 game. The payoff matrix changes according to a random walk. Players observe these payoffs and the population distribution of actions as they evolve. The game has frictions: opportunities to change strategies arrive from independent random processes, so that the players are locked into their actions for some time. As the frictions disappear, each player ignores what the others are doing and switches at her first opportunity to the risk-dominant action. History dependence emerges in some cases when frictions remain positive.

Date: 2001-01-01
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Published in Econometrica 2001,, pp. 163-190

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Journal Article: Fast Equilibrium Selection by Rational Players Living in a Changing World (2001)
Working Paper: Fast Equilibrium Selection by Rational Players Living in a Changing World (1997)
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Persistent link: https://EconPapers.repec.org/RePEc:isu:genres:11923

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