MICRO THEORY: Professor Yuichiro Kamada (University of California, Berkeley)

Unprecedented

We study a dynamic game that entails an action that a player can take only if it is privately learned by chance or if the opponent takes it. Our model has a unique equilibrium, where the new action is never taken and thus remains unprecedented. This is the case even though, after many periods, the players have “almost common knowledge” of having learned the new action. The model provides explanations for phenomena such as media silence in the face of a prominent figure’s misconduct and zombie lending. We also relate our finding to rational investors’ behavior of riding asset-price bubbles.