Playing the game the others want to play : Keynes’ beauty contest revisited

Date: 2015
By: Camille Cornand (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France)
Rodolphe Dos Santos Ferreira (BETA-Strasbourg University, 61 avenue de la Forêt Noire – 67085 Strasbourg Cedex, France; Catolica Lisbon School of Business and Economics)
URL: http://d.repec.org/n?u=RePEc:gat:wpaper:1501&r=net
In Keynes’ beauty contest, agents have to choose actions in accordance with an expected fundamental value and with the conventional value expected to be set by the market. In doing so, agents respond to a fundamental and to a coordination motive respectively, the prevalence of either motive being set exogenously. Our contribution is to consider whether agents favor the fundamental or the coordination motive as the result of a strategic choice that generates a strong strategic complementarity of agents’ actions. We show that the coordination motive tends to prevail over the fundamental one, which yields a disconnection of activity away from the fundamental. A valuation game and a competition game are provided as illustrations of this general framework.
Keywords: beauty contest, financial markets, indeterminacy, oligopolistic competition,strategic complementarities
JEL: D43 D84 E12 E44 L13

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