BOOMS AND SLUMPS IN A GAME OF SEQUENTIAL INVESTMENT WITH THE CHANGING FUNDAMENTALS

Authors

  • DAISUKE OYAMA

    1. University of Tokyo and University of Vienna
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    • I would like to thank Akihiko Matsui for his advice and encouragement. Earlier versions of this paper were presented at the 2001 Spring Meeting of the Japanese Economic Association at Hiroshima Shudo University and the Shadow Workshop at the University of Tokyo. I am grateful to the audiences at these presentations as well as to Munetomo Ando, Hideo Suehiro and an anonymous referee for helpful comments and discussions. Part of this research was done while I was visiting the Department of Economics at the University of Illinois at Urbana-Champaign, whose hospitality is gratefully acknowledged.


Abstract

Many less developed countries have experienced prolonged periods of expansions and reversals in foreign investment inflows. This paper presents a simple game-theoretic model that can explain hysteretic patterns of serial correlation in investment behavior. We develop a sequential move game of coordinated investment played by short-run players under the changing economic environment and demonstrate that in a unique equilibrium of the game, the economy fluctuates over multiple static equilibria, generating hysteresis.

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