In
economics and
game theory
Game theory is the study of mathematical models of strategic interactions among rational agents. Myerson, Roger B. (1991). ''Game Theory: Analysis of Conflict,'' Harvard University Press, p.&nbs1 Chapter-preview links, ppvii–xi It has appli ...
, global games are games of incomplete information where players receive possibly-correlated signals of the underlying state of the world. Global games were originally defined by Carlsson and
van Damme (1993).
The most important practical application of global games has been the study of
crises in financial markets such as
bank runs,
currency crises
A currency crisis is a type of financial crisis, and is often associated with a real economic crisis. A currency crisis raises the probability of a banking crisis or a default crisis. During a currency crisis the value of foreign denominated deb ...
, and
bubbles
Bubble, Bubbles or The Bubble may refer to:
Common uses
* Bubble (physics), a globule of one substance in another, usually gas in a liquid
** Soap bubble
* Economic bubble, a situation where asset prices are much higher than underlying fundame ...
. However, they have other relevant applications such as investments with payoff complementarities,
beauty contests
A beauty pageant is a competition that has traditionally focused on judging and ranking the Physical attractiveness, physical attributes of the contestants. Pageants have now evolved to include inner beauty, with criteria covering judging of Per ...
,
political riots and
revolutions, and any other economic situation which displays
strategic complementarity.
Global games in models of currency crises
Stephen Morris and
Hyun Song Shin (1998) considered a stylized currency crises model, in which traders observe the relevant fundamentals with small noise, and show that this leads to the selection of a unique equilibrium. This result overturns the result in models of
complete information, which feature multiple equilibria.
One concern with the robustness of this result is that the introduction of a theory of prices in global coordination games may reintroduce multiplicity of equilibria.
This concern was addressed in
Angeletos and
Werning (2006) as well as
Hellwig and coauthors (2006).
They show that equilibrium multiplicity may be restored by the existence of prices acting as an endogenous public signal, provided that private information is sufficiently precise.
References
Further reading
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{{game theory
Game theory game classes