On Payoff Heterogeneity in Games with Strategic Complementarities
UPF Economics and Business Working Paper No. 546
Posted: 10 Sep 2002
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: Suggested Citation