Costs of flexibility and equilibrium selection

This paper studies equilibrium selection in coordination games with the help of a dynamic model of social learning. Existing research on this subject proceeds under the assumption that players can choose one or the other action. In contrast, we allow players to choose several actions at the same time (thereby ensuring coordination) by incurring some additional costs. We refer to these costs as the costs of flexibility. Our analysis suggests that if risk-dominance and payoff-dominance considerations conflict, then for low (resp. high) costs of flexibility the long-run equilibrium corresponds to the Pareto-efficient (resp. risk-dominant) equilibrium. We also show that when there is no such conflict the costs of flexibility are irrelevant and the long-run equilibrium always corresponds to the Pareto-efficient equilibrium.