ASSURANCE GAME IN LARGE GROUPS – ECONOMIC EXAMPLES
DOI:
https://doi.org/10.18485/Keywords:
Fiscal stimulus; paradox of thrift; coordinative failures; complementarity; collective action; equilibriumAbstract
I apply game theory to economic problems in large groups (more than two players). I focus on the coordination problem of collective action within assurance game. Coordinative failure in such games is a consequence of the expectation concerning what the other players will do. The prevailing pessimism about the actions of others creates “bad equilibrium,” while the prevailing optimism about the actions of others creates “good equilibrium.” I look into three examples: students’ self-grading, fiscal stimulus, and the absence of investments in undeveloped economies. The main insight is that the coordination failure problem may be solved by state intervention – by way of fiscal stimulus or coordination agent who creates a focal point among consumers and producers.
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