Government Policy and the Probability of Coordination Failures

Posted: 16 Feb 2013

See all articles by Huberto M. Ennis

Huberto M. Ennis

Federal Reserve Banks - Federal Reserve Bank of Richmond

Todd Keister

Rutgers, The State University of New Jersey - Department of Economics

Date Written: 2003

Abstract

This paper introduces an approach to the study of optimal government policy in economies characterized by a coordination problem and multiple equilibria. Such models are often criticized as not being useful for policy analysis because they fail to assign a unique prediction to each possible policy choice. We employ a selection mechanism that assigns, ex ante, a probability to each equilibrium indicating how likely it is to obtain. We show how such a mechanism can be derived as the natural result of an adaptive learning process. This approach leads to a well-defined optimal policy problem, and has important implications for the conduct of government policy. We illustrate these implications using a simple model of technology adoption under network externalities.

Keywords: coordination problems, equilibrium selection, learning, network externalities

JEL Classification: E61, D83, H21

Suggested Citation

Ennis, Huberto M. and Keister, Todd, Government Policy and the Probability of Coordination Failures (2003). European Economic Review, Vol. 49, No. 4, 2005. Available at SSRN: https://ssrn.com/abstract=2218570

Huberto M. Ennis

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Todd Keister (Contact Author)

Rutgers, The State University of New Jersey - Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States

HOME PAGE: http://econweb.rutgers.edu/tkeister

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