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Coordination and the Relative Cost of Distinguishing Nearby States

Author

Listed:
  • Stephen Morris

    (Princeton University)

  • Ming Yang

    (Duke University)

Abstract
We study a coordination game where players simultaneously acquire information prior to the play of the game. We allow general information acquisition technologies, modeled by a cost functional mapping from information structures. Costly local distinguishability is a property requiring that the cost of distinguishing nearby states is hard relative to distinguishing distant states. This property is not important in decision problems, but is crucial in determining equilibrium outcomes in games. If it holds, there is a unique equilibrium; if it fails, there are multiple equilibria close to those that would exist if there was complete information. We study these issues in the context of a regime change game with a continuum of players. We also provide a common belief foundation for equilibria of this game. This allows us to distinguish cases where the players could (physically) acquire information giving rise to multiple equilibria, but choose not to, and situations where players could not physically have acquired information in a way consistent with multiple equilibria. Our analysis corresponds to the former case, while the choosing precision of additive noise corresponds to the latter case.

Suggested Citation

  • Stephen Morris & Ming Yang, 2016. "Coordination and the Relative Cost of Distinguishing Nearby States," Working Papers 079_2016, Princeton University, Department of Economics, Econometric Research Program..
    • Handle: RePEc:pri:metric:079_2016
    as

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    References listed on IDEAS

    as
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    6. Dewatripont,Mathias & Hansen,Lars Peter & Turnovsky,Stephen J. (ed.), 2003. "Advances in Economics and Econometrics," Cambridge Books, Cambridge University Press, number 9780521524131, September.
    7. Szkup, Michal & Trevino, Isabel, 2015. "Information acquisition in global games of regime change," Journal of Economic Theory, Elsevier, vol. 160(C), pages 387-428.
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    9. Dewatripont,Mathias & Hansen,Lars Peter & Turnovsky,Stephen J. (ed.), 2003. "Advances in Economics and Econometrics," Cambridge Books, Cambridge University Press, number 9780521524117, September.
    10. Andrew Caplin & Mark Dean, 2015. "Revealed Preference, Rational Inattention, and Costly Information Acquisition," American Economic Review, American Economic Association, vol. 105(7), pages 2183-2203, July.
    11. Morris, Stephen & Shin, Hyun Song & Yildiz, Muhamet, 2016. "Common belief foundations of global games," Journal of Economic Theory, Elsevier, vol. 163(C), pages 826-848.
    12. Dewatripont,Mathias & Hansen,Lars Peter & Turnovsky,Stephen J. (ed.), 2003. "Advances in Economics and Econometrics," Cambridge Books, Cambridge University Press, number 9780521818735, September.
    13. Dewatripont,Mathias & Hansen,Lars Peter & Turnovsky,Stephen J. (ed.), 2003. "Advances in Economics and Econometrics," Cambridge Books, Cambridge University Press, number 9780521524124, September.
    14. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
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    Citations

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    Cited by:

    1. Mensch, Jeffrey, 2021. "Rational inattention and the monotone likelihood ratio property," Journal of Economic Theory, Elsevier, vol. 196(C).
    2. Benjamin Hébert & Michael Woodford, 2021. "Neighborhood-Based Information Costs," American Economic Review, American Economic Association, vol. 111(10), pages 3225-3255, October.
    3. Stephen Morris & Ming Yang, 2016. "Coordination and Continuous Choice," Working Papers 087_2017, Princeton University, Department of Economics, Econometric Research Program..
    4. Angeletos, G.-M. & Lian, C., 2016. "Incomplete Information in Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 1065-1240, Elsevier.
    5. Hebert, Benjamin & Woodford, Michael, 2018. "Information Costs and Sequential Information Sampling," Research Papers 3751, Stanford University, Graduate School of Business.
    6. George-Marios Angeletos & Chen Lian, 2016. "Incomplete Information in Macroeconomics: Accommodating Frictions in Coordination," NBER Working Papers 22297, National Bureau of Economic Research, Inc.
    7. George-Marios Angeletos & Karthik Sastry, 2019. "Inattentive Economies," NBER Working Papers 26413, National Bureau of Economic Research, Inc.
    8. Benjamin Hébert & Michael Woodford, 2017. "Rational Inattention and Sequential Information Sampling," NBER Working Papers 23787, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    coordination; endogenous information acquisition; costly local distinguishability; higher order beliefs;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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