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Strategic Uncertainty and the Costs and Benefits of Diversity

Abstract: This paper presents a novel mechanism under which diversity affects performance. By modelling the psychological process by which players take one another's perspective, we show that diversity can influence the strategic uncertainty that a player faces. Accordingly, diversity matters even if it has no direct impact on payoffs. Whether diversity is a cost or a benefit depends on whether the primary concern is to reduce the risk of miscoordination or to avoid being locked into an inefficient Nash equilibrium.