DP6733 A User's Guide to Solving Dynamic Stochastic Games Using the Homotopy Method

Author(s): Ron N. Borkovsky, Ulrich Doraszelski, Yaroslav Kryukov
Publication Date: March 2008
Keyword(s): computation, dynamic stochastic games, homotopy method, Markov-perfect equilibrium
JEL(s): C63, C73
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=6733

This paper provides a step-by-step guide to solving dynamic stochastic games using the homotopy method. The homotopy method facilitates exploring the equilibrium correspondence in a systematic fashion; it is especially useful in games that have multiple equilibria. We discuss the theory of the homotopy method and its implementation and present two detailed examples of dynamic stochastic games that are solved using this method.