Paper #546

Title:

On payoff heterogeneity in games with strategic complementarities

Authors:

Antonio Ciccone and James Costain

Date:

April 2001 (Revised: February 2002)

Abstract:

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 codes:

C72, E00

Area of Research:

Microeconomics

Published in:

Oxford Economic Papers, 56 (4), 701-713, 2004

Download the paper in PDF format