Equilibria in a dynamic global game: the role of cohort effects |
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Authors: | Paul Heidhues Nicolas Melissas |
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Institution: | (1) University of Bonn, WZB and CEPR, Adenauerallee 24-42, 53113 Bonn, GERMANY;(2) Department of Economics, University of Leicester, University Road, LE1 7RH Leicester, UK |
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Abstract: | Summary. We introduce strategic waiting in a global game setting with irreversible investment. Players can wait in order to make a better informed decision. We allow for cohort effects, which arise endogenously in technology adoption problems with positive contemporaneous network effects. Formally, cohort effects lead to intra-period network effects being greater than inter-period network effects. Depending on the nature of the cohort effects, our game may or may not satisfy dynamic increasing differences. If it does, our model has a unique rationalizable outcome. Otherwise, multiple equilibria may exist as players want to invest at the same point in time others do.Received: 13 July 2004, Revised: 20 May 2005, JEL Classification Numbers:
C72, C73, D82, D83.We thank George-Marios Angeletos, Helmut Bester, Andreas Blume, Estelle Cantillon, Frank Heinemann, Christian Hellwig, Larry Karp, Tobias Kretschmer, In Ho Lee, Robin Mason and an anonymous referee for helpful comments. We also thank seminar participants at the EEA-meeting in Stockholm 2003, ESRC Workshop in Warwick 2004, Free University Berlin, IAE (Barcelona), Keele, MIT, Southampton, University of Pittsburgh, and at a CEPR-conference in Brussels 2002 for comments, and the European Union for providing financial support through the TMR network on network industries (Contract number FMRX-CT98-0203). This paper was completed while the first author visited the Department of Economics at MIT, whose hospitality he gratefully acknowledges. |
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Keywords: | Global game Strategic waiting Coordination Strategic complementarities Period-specific network effects Equilibrium selection |
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