Announcements as an Equilibrium Selection Device
Paolo Piacquadio, Nicola Acocella, Giovanni Di Bartolomeo and Andrew Hughes-Hallett
Photo: Oxford University Press
Oxford Economic Papers 2014 66 (1) p.p. 325-347.
We address the coordination failures that arise in models with multiple equilibria and study how they may be resolved by reconsidering the role of cheap talk communication as an equilibrium selection device. We introduce an outside option (representing common-knowledge expected outcomes in the absence of coordination), and show that a player may be forced to make an announcement leading to a sub-optimal outcome with respect to the commitment solution (a binding message) in order to keep the message credible. The main contribution is to show, by means of examples taken from standard macro- and microeconomic decision making problems, how the existing tools of bargaining can be applied to models with multiple equilibria to produce sensible outcomes. The purpose is to provide a formal underpinning for methods that resolve multiple equilibrium problems by exploiting the power of policy announcements.