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On payoff heterogeneity in games with strategic complementarities
Ciccone, Antonio; Costain, James
Universitat Pompeu Fabra. Departament d'Economia i Empresa
Payoff heterogeneity weakens positive feedback in binary choice models intwo ways. First, heterogeneity drives individuals to corners where theyare unaffected by strategic complementarities. Second, aggregate behaviouris smoother than individual behaviour when individuals are heterogeneous.However, this smoothing does not necessarily eliminate positive feedbackor guarantee a unique equilibrium. In games with an unbounded, continuouschoice space, heterogeneity may either weaken or strengthen positive feedback,depending on a simple convexity/concavity condition. We conclude that positivefeedback phenomena derived in representative agent models will often be robustto heterogeneity.
discrete choice
strategic complementarity
positive feedback
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