Expectational stability in aggregative games

Abstract

In aggregative games individuals’ payoffs depend on players’ own contributions (or strategies) and on the aggregate contribution of other players. The replacement function, which defines the optimal contribution of a player in an aggregate contribution, is a convenient tool to analyze aggregative games. In this paper, the replacement function is used to define an adjustment process of expectations with respect to the aggregate strategy of the game. The Nash equilibrium of the game is interpreted as the rational expectations equilibrium (REE) of the dynamical system defined by that adjustment process. The expectational stability of the REE is analyzed and its local stability is characterized in terms of the fundamentals and the REE itself. Stronger results of global stability can be obtained when the model is applied to specific aggregative games with explicit payoff functions. Examples of Cournot oligopoly and public goods provision games are presented to illustrate global stability. Show more