Intertemporal coordination in a two period economy

Economics

Further details

This paper studies the stability of the intertemporal coordination dynamics that arise when the common knowledge of individual expectations of future prices is perturbed in a neighborhood of a perfect foresight equilibrium. The main forces that affect stability are: (i) the effect of a change in asset demand on second period spot market prices, (ii) the effect on asset demand of a small change in second period prices. In a class of non-atomic, anonymous, sequential games, it is shown that while the stability of the intemporal coordination dynamics is always implied by local extensive-form rationalizability, the converse does not always hold.