Strategic Mistakes

57 Pages Posted: 3 Sep 2020 Last revised: 14 Aug 2021

See all articles by Joel P. Flynn

Joel P. Flynn

Massachusetts Institute of Technology (MIT) - Department of Economics

Karthik Sastry

Harvard University, Department of Economics

Date Written: July 8, 2021

Abstract

To study the equilibrium implications of imperfect optimization, we introduce a model of costly control in continuum-player games in which agents interact via an aggregate of the actions of others. We find primitive conditions such that equilibria exist, are unique, are efficient, and feature monotone comparative statics for action distributions, aggregates, and the size of agents' mistakes. We use our results to provide robust equilibrium predictions in a class of generalized beauty contests, which we apply to study the implications of imperfect optimization for financial speculation, price-setting, and the business cycle. We contrast our model with the mutual information model (Sims, 2003), which in the same games can produce non-unique predictions and non-monotone comparative statics.

Keywords: Equilibrium, Behavioral Macroeconomics, Stochastic Choice

JEL Classification: D5, D8, E1, E7

Suggested Citation

Flynn, Joel P. and Sastry, Karthik, Strategic Mistakes (July 8, 2021). Available at SSRN: https://ssrn.com/abstract=3663481 or http://dx.doi.org/10.2139/ssrn.3663481

Joel P. Flynn (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
E52-391
Cambridge, MA 02142
United States

Karthik Sastry

Harvard University, Department of Economics ( email )

Cambridge, MA 02138

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