Expectations, Networks, and Conventions

71 Pages Posted: 3 Jun 2017 Last revised: 19 Jan 2018

Date Written: September 9, 2017

Abstract

In coordination games and speculative over-the-counter financial markets, solutions depend on higher-order average expectations: agents' expectations about what counterparties, on average, expect their counterparties to think, etc. We offer a unified analysis of these objects and their limits, for general information structures, priors, and networks of counterparty relationships. Our key device is an interaction structure combining the network and agents' beliefs, which we analyze using Markov methods. This device allows us to nest classical beauty contests and network games within one model and unify their results. Two applications illustrate the techniques: The first characterizes when slight optimism about counterparties' average expectations leads to contagion of optimism and extreme asset prices. The second describes the tyranny of the least-informed: agents coordinating on the prior expectations of the one with the worst private information, despite all having nearly common certainty, based on precise private signals, of the ex post optimal action.

Keywords: networks, incomplete information, centrality, common prior, heterogeneous priors, network game

Suggested Citation

Golub, Benjamin and Morris, Stephen Edward, Expectations, Networks, and Conventions (September 9, 2017). Available at SSRN: https://ssrn.com/abstract=2979086 or http://dx.doi.org/10.2139/ssrn.2979086

Benjamin Golub (Contact Author)

Northwestern University ( email )

Evanston, IL 60201
United States

Stephen Edward Morris

MIT ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

HOME PAGE: http://https://economics.mit.edu/faculty/semorris

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