Booms and Slumps in a Game of Sequential Investment with
the Changing Fundamentals

Daisuke Oyama
Graduate School of Economics, University of Tokyo

Many less developed countries have experienced prolonged periods of expansions and reversals in foreign investment inflows. This paper presents a simple game-theoretic model that can explain hysteretic patterns of serial correlation in investment behavior. We develop a sequential move game of coordinated investment played by short-run players under the changing economic environment and demonstrate that in a unique equilibrium of the game, the economy fluctuates over multiple static equilibria, generating hysteresis.
JEL Classification Numbers: C72, C73.
Key Words: economic fluctuation; hysteresis; strategic complementarity; sequential move game; random payoff; equilibrium selection; global game.

Japanese Economic Review 55 (2004), 311-320. PDF file
First draft: April 23, 2001; this version: August 26, 2003. PDF file