Optimal Policy with Probabilistic Equilibrium Selection

@inproceedings{Ennis2001OptimalPW,
  title={Optimal Policy with Probabilistic Equilibrium Selection},
  author={Huberto M. Ennis and Todd Keister},
  year={2001}
}
This paper introduces an approach to the study of optimal government policy in economies characterized by a coordination problem and multiple equilibria. Such models are often criticized as not being useful for policy analysis because they fail to assign a unique prediction to each possible policy choice. We employ a selection mechanism that assigns, ex ante, a probability to each equilibrium indicating how likely it is to obtain. With this, the optimal policy is well defined. We show how such… CONTINUE READING

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