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

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  • Camille Cornand
  • Rodolphe Dos Santos Ferreira

Abstract

In Keynes’ beauty contest, agents make choices by referring to their expectations of some fundamental value and of the conventional value to be set by the market. In doing so, agents respond to fundamental and strategic motives, respectively. The prevalence of either motive is usually set exogenously. Our contribution is to consider whether agents favor one of the two motives when the relative weights put on them are taken as strategic variables. We show that the strategic motive tends to prevail over the fundamental one, yielding a disconnection of agents’ actions from the fundamental. This is done in a simple valuation game emphasizing the role of public information. We then extend the same result to competition between the owners of two firms, by using a delegation game in which informational issues are embedded into a broader microfounded setting.

Suggested Citation

  • Camille Cornand & Rodolphe Dos Santos Ferreira, 2016. "Playing the game the others want to play: Keynes’ beauty contest revisited," Working Papers of BETA 2016-20, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  • Handle: RePEc:ulp:sbbeta:2016-20
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    References listed on IDEAS

    as
    1. Martimort, David & Stole, Lars, 2011. "Aggregate Representations of Aggregate Games," MPRA Paper 32871, University Library of Munich, Germany.
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    More about this item

    Keywords

    beauty contest; dispersed information; public signals; coordination; competition.;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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