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Selection-free predictions in global games with endogenous information and multiple equilibria


Angeletos, George-Marios; Pavan, Alessandro (2013). Selection-free predictions in global games with endogenous information and multiple equilibria. Theoretical Economics, 8(3):883-938.

Abstract

Global games with endogenous information often exhibit multiple equilibria. In this paper we show how one can nevertheless identify useful predictions that are robust across all equilibria and that could not have been delivered in the common-knowledge counterparts of these games. Our analysis is conducted within a flexible family of games of regime change, which have been used to model, inter alia, speculative currency attacks, debt crises, and political change. The endogeneity of information originates in the signaling role of policy choices. A novel procedure
of iterated elimination of non-equilibrium strategies is used to deliver probabilistic predictions that an outside observer—an econometrician—can form under arbitrary equilibrium selections. The sharpness of these predictions improves as the noise gets smaller, but disappears in the
complete-information version of the model.

Abstract

Global games with endogenous information often exhibit multiple equilibria. In this paper we show how one can nevertheless identify useful predictions that are robust across all equilibria and that could not have been delivered in the common-knowledge counterparts of these games. Our analysis is conducted within a flexible family of games of regime change, which have been used to model, inter alia, speculative currency attacks, debt crises, and political change. The endogeneity of information originates in the signaling role of policy choices. A novel procedure
of iterated elimination of non-equilibrium strategies is used to deliver probabilistic predictions that an outside observer—an econometrician—can form under arbitrary equilibrium selections. The sharpness of these predictions improves as the noise gets smaller, but disappears in the
complete-information version of the model.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Uncontrolled Keywords:Global games, multiple equilibria, endogenous information, robust predictions
Language:English
Date:September 2013
Deposited On:24 Jan 2014 13:25
Last Modified:26 Jan 2017 08:55
Publisher:Society for Economic Theory
ISSN:1555-7561
Free access at:Publisher DOI. An embargo period may apply.
Official URL:http://www.econtheory.org/ojs/index.php/te/article/view/20130883

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