Complementarities and substitutabilities in matching models

This paper describes an equilibrium matching model with two types of workers producing two different intermediate goods. Labour markets are perfectly segmented, but productive complementarities between sectors and productive substitutability within sectors arise. This deeply changes the effects of labour market policies. A welfare analysis is also conducted. Under constant returns to scale in the matcing technology, the so-called Hosios condition is sufficient to guarantee the efficiency of the decentralized equilibrium.

Mean Field Equilibrium in Dynamic Games with Complementarities

We study a class of stochastic dynamic games that exhibit strategic complementarities between players; formally, in the games we consider, the payoff of a player has increasing differences between her own state and the empirical distribution of the states of other players. Such games can be used to model a diverse set of applications, including network security models, recommender systems, and dynamic search in markets. Stochastic games are generally difficult to analyze, and these difficulties are only exacerbated when the number of players is large (as might be the case in the preceding examples). We consider an approximation methodology called mean field equilibrium to study these games. In such an equilibrium, each player reacts to only the long run average state of other players. We find necessary conditions for the existence of a mean field equilibrium in such games. Furthermore, as a simple consequence of this existence theorem, we obtain several natural monotonicity properties. We show that there exist a "largest" and a "smallest" equilibrium among all those where the equilibrium strategy used by a player is nondecreasing, and we also show that players converge to each of these equilibria via natural myopic learning dynamics; as we argue, these dynamics are more reasonable than the standard best response dynamics. We also provide sensitivity results, where we quantify how the equilibria of such games move in response to changes in parameters of the game (e.g., the introduction of incentives to players).Comment: 56 pages, 5 figure

Finding all equilibria in games of strategic complements

I present a simple and fast algorithm that finds all the pure-strategy Nash equilibria in games with strategic complementarities. This is the first non-trivial algorithm for finding all pure-strategy Nash equilibria

Complementarities and systems: Understanding japanese economic organization

The performance of the Japanese economy in the last forty five years, during which it has gone from post war destitution and near collapse to one of the richest and most productive in the world is unmatched in human history. The purposes of this essay are to interpret both the characteristic features of Japanese economic organization in terms of the concept of complementarity, and some recent developments in Japanese economy, and to speculate on its future.

Specific factors meet intermediate inputs: implications for strategic complementarities and persistence.

A central challenge to monetary business-cycle theory is to find a solution to the problem of persistence and delay in the real effects of monetary shocks. Previous research has identified separately specific factors and intermediate inputs as two promising mechanisms for generating the persistence and delay in a staggered price-setting framework. Models based on either of these two mechanisms have also been used in the design of optimal monetary policy. ; By examining a staggered price model that features both specific factors and intermediate inputs, the author finds an offsetting interaction between the two individually promising mechanisms, which leads to a cancellation of much of the impact of each in propagating monetary shocks. This finding posits a challenge to the search for a robust monetary transmission mechanism and design of optimal monetary policy.Business cycles

Coordination cycles

Players repeatedly face a coordination problem in a dynamic global game. By choosing a risky action (invest) instead of waiting, players risk instantaneous losses as well as a loss of payoffs from future stages, in which they cannot participate if they go bankrupt. Thus, the total strategic risk associated with investment in a particular stage depends on the expected continuation payoff. High continuation payoff makes investment today more risky and therefore harder to coordinate on, which decreases today’s payoff. Thus, expectation of successful coordination tomorrow undermines successful coordination today, which leads to fluctuations of equilibrium behavior even if the underlying economic fundamentals happen to be the same across the rounds. The dynamic game inherits the equilibrium uniqueness of the underlying static global game

Games of strategic complementarities: An application to bayesian games

Games of strategic complementarities are those in which any player increases his action in response to an increase in the level of actions of rivals. This paper provides an introduction to the theory of games of strategic complementarities, considers Bayesian games, and provides an application to global games.Strategic complementarities; games theory;

Coevolutionary Investments in Human Speech and Trade

We propose a novel explanation for the emergence of language in modern humans, and the lack thereof in other hominids. A coevolutionary process, where trade facilitates speech and speech facilitates trade, driven by expectations and potentially influenced by geography, gives rise to multiple stable development trajectories. While the trade-speech equilibrium is not an inevitable outcome for modern humans, we do find that it is a relatively likely result given that our species evolved in Africa under climatic conditions supporting relatively high population densities.Institutional and Behavioral Economics,

House price momentum and strategic complementarity

House prices exhibit substantially more momentum, positive autocorrelation in price changes, than existing theories can explain. I introduce an amplification mechanism to reconcile this discrepancy. Sellers do not set a unilaterally high or low list price because they face a concave demand curve: increasing the price of an above-average-priced house rapidly reduces its sale probability, but cutting the price of a below-average-priced house only slightly improves its sale probability. The resulting strategic complementarity amplifies frictions because sellers gradually adjust their price to stay near average. I provide empirical evidence for concave demand using a quantitative search model that amplifies momentum two- to threefold

Information acquisition in financial markets: a correction

This note provides a proper example for the mechanism of strategic complementarities proposed in our paper. ; Original paper in Review of Economic Studies, January 2000, v. 67, no.1, p. 79–90.Information theory ; Financial markets