A note on the hybrid equilibrium in the Besley-Smart model
Lockwood, Ben (2005) A note on the hybrid equilibrium in the Besley-Smart model. Working Paper. Coventry: University of Warwick, Department of Economics. (Warwick economic research papers).
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This note shows that there is always a non-empty set of parameter values for which the hybrid in the Besley and Smart (2003) model is unstable in the sense of Cho and Kreps. This set may include all the parameter values for which a hybrid equilibrium exists. For these parameter values, it is shown that a fully separating equilibrium always exists, which is Cho-Kreps stable. In this equilibrium, the good incumbent distorts fiscal policy to signal his type. An implication is that equilibrium in their model is not (generically) unique.
|Item Type:||Working or Discussion Paper (Working Paper)|
|Subjects:||H Social Sciences > HB Economic Theory|
|Divisions:||Faculty of Social Sciences > Economics|
|Library of Congress Subject Headings (LCSH):||Equilibrium (Economics), Parameter estimation, Fiscal policy, Probabilities, Agent (Philosophy)|
|Series Name:||Warwick economic research papers|
|Publisher:||University of Warwick, Department of Economics|
|Place of Publication:||Coventry|
|Date:||20 April 2005|
|Number of Pages:||6|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Open Access|
|References:||Besley, T. and M. Smart (2003), "Fiscal Restraints and Voter Welfare", unpublished paper, LSE Cho, I-K. and D. Kreps (1987), �Signaling games and Stable Equilibria�, Quarterly Journal of Economics, 102, 179-221.|
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