Ambiguity and social interaction
Schipper, Burkhard C.
University of Heidelberg; University of Exeter; University of California, Davis
Oxford Economic Papers
Oxford University Press
We present a non-technical account of ambiguity in strategic games and show how it may be applied to economics and social sciences. Optimistic and pessimistic responses to ambiguity are formally modelled. We show that pessimism has the effect of increasing (decreasing) equilibrium prices under Cournot (Bertrand) competition. In addition the effects of ambiguity on peace-making are examined. It is shown that ambiguity may select equilibria in coordination games with multiple equilibria. Some comparative statics results are derived for the impact of ambiguity in games with strategic complements.
Working paper published in SSRN Electronic journal. Final version published in Oxford Economic Papers © Oxford University Press 2008. Available online at http://oep.oupjournals.org/