Binary games with state dependent Stochastic choice

This paper studies a stochastic equilibrium selection model for binary coordination games, Players switch strategies stochastically so that the mistake probabilities a re fully dependent on the Population states, A probabilistic behavior is said to be aspiration (imitation, resp.) oriented if strategy switches are mainly driven by the aspiration (imitation, resp.) effect. In general, a strategy switch by one player generates externalities on others. Strategies in a coordination game can be classified according to the relative magnitude of their externality effects. It is shown that the selection outcome for a linear coordination game is determined in a specific way by the balance of the risk dominance, the aspiration/imitation, and the externality effects. It is also shown that an aspiration (imitation, resp.) oriented behavior tends to select payoff dominant (maxmin, resp.) equilibrium and that risk dominant equilibrium is always selected if and only if the aspiration and the imitation effects exactly cancel each other out, which in turn makes the selection process insensitive to externality effects. (C) 2001 Elsevier Science (USA).