On Payoff Heterogeneity in Games with Strategic Complementarities

UPF Economics and Business Working Paper No. 546

Posted: 10 Sep 2002

See all articles by Antonio Ciccone

Antonio Ciccone

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences; Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)

James S. Costain

Banco de España - Research Department

Abstract

Payoff heterogeneity weakens positive feedback in binary choice models in two ways. First, heterogeneity drives individuals to corners where they are unaffected by strategic complementarities. Second, aggregate behaviour is smoother than individual behaviour when individuals are heterogeneous. However, this smoothing does not necessarily eliminate positive feedback or guarantee a unique equilibrium. In games with an unbounded, continuous choice space, heterogeneity may either weaken or strengthen positive feedback, depending on a simple convexity/concavity condition. We conclude that positive feedback phenomena derived in representative agent models will often be robust to heterogeneity.

Keywords: Heterogeneity, multiplicity, discrete choice, strategic complementarity, positive feedback

JEL Classification: C72, E00

Suggested Citation

Ciccone, Antonio and Costain, James S., On Payoff Heterogeneity in Games with Strategic Complementarities. UPF Economics and Business Working Paper No. 546. Available at SSRN: https://ssrn.com/abstract=310111

Antonio Ciccone (Contact Author)

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
+34 93 542 1669 (Phone)
+34 93 542 1746 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

James S. Costain

Banco de España - Research Department ( email )

Alcala 50
28014 Madrid
Spain

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