Observing Each Other's Observations in a Bayesian Coordination Game

17 Pages Posted: 11 Dec 2015

See all articles by Dominik Grafenhofer

Dominik Grafenhofer

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods

Wolfgang Kuhle

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods

Date Written: November 2015

Abstract

We study a Bayesian coordination game where agents receive private information on the game's payoff structure. In addition, agents receive private signals that inform them of each other's private information. We show that once agents possess these different types of information, there exists a coordination game in the evaluation of this information. Even though the precisions of both signal types is exogenous, the precision with which agents forecast each other's actions in equilibrium turns out to be endogenous. As a consequence, there exist multiple equilibria which differ with regard to the way that agents weight their private information to forecast each other's actions. Finally, even though all players' signals are of identical quality, it turns out that efficient equilibria are asymmetric.

Keywords: Coordination Games, Equilibrium Selection, Primary Signals, Sec- ondary Signals

Suggested Citation

Grafenhofer, Dominik and Kuhle, Wolfgang, Observing Each Other's Observations in a Bayesian Coordination Game (November 2015). MPI Collective Goods Preprint, No. 2015/18. Available at SSRN: https://ssrn.com/abstract=2702292 or http://dx.doi.org/10.2139/ssrn.2702292

Dominik Grafenhofer (Contact Author)

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany

Wolfgang Kuhle

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
Bonn, 53113
Germany

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