Two-Player Binary Global Games without Dominance Solvable States

We extend global games `a la Carlsson and van Damme (1993) to environments where the risk-dominant equilibrium is selected even if there is no dominance solvable game in the underlying class of games. Strict dominance can emerge in the global game from strategic uncertainty due to discrete payoff changes in underlying games, and we provide sufficient conditions on payoff changes that warrant iterated dominance of the risk-dominant equilibrium. Thus, strategic uncertainty creates strictly dominant actions as well as fostering iterated dominance, in contrast to global games hitherto where strategic uncertainty does only the latter. Discrete payoff changes tend to arise, in particular, in situations where a public good can be provided with varying degrees of coordination depending on the state, so that coordinating actions can be strategic substitutes and free-riding incentives are present. We illustrate our findings in a stylized public good provision model.