Global game

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In economics and game theory, global games are games of incomplete information where players receive possibly-correlated signals of the underlying state of the world. Global games were originally defined by Carlsson and van Damme (1993).[1]

The most important practical application of global games has been the study of crises in financial markets such as bank runs, currency crises, and bubbles. However, they have other relevant applications such as investments with payoff complementarities, beauty contests, political riots and revolutions, and any other economic situation which displays strategic complementarity.

Global games in models of currency crises

Stephen Morris and Hyun Song Shin (1998)[2] considered a stylized currency crises model, in which traders observe the relevant fundamentals with small noise, and show that this leads to the selection of a unique equilibrium. This result overturns the result in models of complete information, which feature multiple equilibria.

One concern with the robustness of this result is that the introduction of a theory of prices in global coordination games may reintroduce multiplicity of equilibria (Atkeson, 2001). This concern was addressed in Angeletos and Werning (2006)[3] and Hellwig et al.(2006).[4] They show that equilibrium multiplicity may be restored by the existence of prices acting as an endogenous public signal, provided that private information is sufficiently precise.

References

  1. ^ Hans Carlsson and Eric van Damme (1993), "Global Games and Equilibrium Selection," Econometrica 61 (5): 989-1018.
  2. ^ Stephen Morris and Hyun Song Shin (1998), "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," American Economic Review, 88 (3): 587–97.
  3. ^ George-Marios Angeletos and Ivan Werning (2006), "Crises and Prices: Information Aggregation, Multiplicity, and Volatility," American Economic Review, 96 (5): 1720–36.
  4. ^ Christian Hellwig, Arijit Mukherji and Aleh Tsyvinski (2006), "Self-Fulfilling Currency Crises: The Role of Interest Rates," American Economic Review, 96 (5): 1769-1787.

Further reading

  • Andrew G. Atkeson, (2001), "Rethinking Multiple Equilibria in Macroeconomic Modeling: Comment." In NBER Macroeconomics Annual 2000, ed. Ben S. Bernanke and Kenneth Rogoff, 162–71. Cambridge, MA: MIT Press.
  • Stephen Morris & Hyun S Shin, 2001. "Global Games: Theory and Applications."
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