ICES Brown Bag for November 14

Events, Seminars | November 4, 2019

Join us for the ICES Brown Bag Lecture of the Fall 2019 semester, featuring Brian Albrecht.

Mr. Albrecht, of University of Minnesota, will discuss his paper Investment without Coordination Failures (Abstract). The talk will take place on Thursday, November 14th, from 12:00 to 1:00pm, in room 5075 of the Vernon Smith Hall, Arlington campus.

Coffee and dessert will be provided.

Please visit the Brown Bag Schedule to learn more about the Brown Bag series.

Abstract

I study games with incomplete markets where agents must sink their investments before they can join a match that generates value. I focus on competitive matching markets where there is a public price to join any match. Despite the First Welfare Theorem, coordination failures can still arise because of the market incompleteness. Armen does not invest because Bengt does not invest, vice versa, and they are unable to write enforceable contracts to ensure joint investments. In these games, multiple equilibria can exist, with both efficient investment and not. However, the standard, Nash solution concept used in these games does not help in determining if all equilibria are equally robust or stable. I argue that we should replace the Nash solution concept in this context with a mild refinement: trembling-hand perfection. I prove that—in a general class of models with general heterogeneity of types, costs of investments, and matching surpluses—small trembles rule out coordination failures. My main theorem is a modified First Welfare Theorem: even with endogenous and incomplete markets, every perfect, competitive equilibrium is efficient.

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