Working Paper: CEPR ID: DP16495
Authors: Stephen Morris; Ming Yang
Abstract: Players receive a return to investment that is increasing in the proportion of others who invest and the state, and incur a small cost for acquiring information about the state. Their information is reflected in a stochastic choice rule, specifying the probability of a signal leading to investment. If discontinuous stochastic choice rules are infinitely costly, there is a unique equilibrium as costs become small, in which actions are a best response to a uniform (Laplacian) belief over the proportion of others investing. Infeasibility of discontinuous stochastic choice rules captures the idea that it is impossible to perfectly distinguish states that are arbitrarily close together and is both empirically documented and satisfied by many natural micro-founded cost functionals on information. Our results generalize global game selection results (Carlsson and van Damme (1993) and Morris and Shin (2003)), and establish that they do not depend on the specific additive noise information structure.
Keywords: Coordination; Endogenous Information Acquisition; Continuous Stochastic Choice
JEL Codes: C72; D82
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| players' actions (Z22) | cost of information acquisition (D83) |
| cost of information (D83) | players' strategies (C72) |
| proportion of others who invest (G11) | players' returns to investment (Z22) |
| cost of information (D83) | unique equilibrium of stochastic choice game (C73) |
| cost functional properties (D24) | unique equilibrium selection (C62) |
| cost of information (D83) | Nash equilibrium of complete information games (C72) |
| difficulty in distinguishing states (H73) | players' strategic choices (C72) |