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Fast Equilibrium Selection by Rational Players Living in a Changing World
Author(s) -
Burdzy Krzysztof,
Frankel David M.,
Pauzner Ady
Publication year - 2001
Publication title -
econometrica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 16.7
H-Index - 199
eISSN - 1468-0262
pISSN - 0012-9682
DOI - 10.1111/1468-0262.00181
Subject(s) - stochastic game , mathematical economics , action (physics) , repeated game , equilibrium selection , normal form game , economics , symmetric game , coordination game , selection (genetic algorithm) , population , microeconomics , computer science , game theory , physics , demography , quantum mechanics , artificial intelligence , sociology
We study a coordination game with randomly changing payoffs and small frictions in changing actions. Using only backwards induction, we find that players must coordinate on the risk‐dominant equilibrium. More precisely, a continuum of fully rational players are randomly matched to play a symmetric 2×2 game. The payoff matrix changes according to a random walk. Players observe these payoffs and the population distribution of actions as they evolve. The game has frictions: opportunities to change strategies arrive from independent random processes, so that the players are locked into their actions for some time. As the frictions disappear, each player ignores what the others are doing and switches at her first opportunity to the risk‐dominant action. History dependence emerges in some cases when frictions remain positive.