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Simple Coordination Games

# Simple Coordination Games

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Some example of simple coordination games are given to show the outcome will not always be Pareto Optimal. Macroeconomics can display such coordination failures.
Some example of simple coordination games are given to show the outcome will not always be Pareto Optimal. Macroeconomics can display such coordination failures.

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09/06/2013

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# Simple Coordination Games As Metaphor

A way to understand that macro-econ is not just decision theory. Cures to macro issues must acknowledge this.

Some Non-Cooperative Games Will Be Presented to Illustrate The Issues
This means that each player chooses a strategy without knowing what the other player will do. That must be guessed.

Non-Cooperative Equilibria (John Nash)
Each player chooses a strategy and has an expectation of what the other player will do. In equilibrium, play and expectations concur.

Column Player

Left
Row Player

Right (0,0) (1,1)

Top
Bottom

(10,10)
(0,0)

The basic coordination game has two equilibria: (Top, Left) is an equilibrium, so is (Bottom, Right).

Column Player

Left
Row Player

Right (0,0) (1,1)

Top
Bottom

(10,10)
(0,0)

(T,L) Pareto Dominates (Bottom Right). It is reasonable to conclude that the players will end up playing (T,L).

Column Player

Left
Row Player

Right (-50,0) (1,1)

Top
Bottom

(10,10)
(0,-50)

The game has changed via the offdiagonal elements. Top is more risky than Bottom. Left is more risky than Right.

Column Player

Left
Row Player

Right (-50,0) (1,1)

Top
Bottom

(10,10)
(0,-50)

Risk Dominance can trump Pareto Dominance. It is reasonable to conclude that (B,R) will be the outcome here.

Macroeconomics As Potential Coordination Failures
That the economy performs well below its potential GDP is indicative of coordination problems, which must be addressed.

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