Models of strategic interaction are common in the economic growth literature, as well as in many other fields. For example, in human capital spillover models of economic growth, your incentive to acquire human capital depends on the human capital of others. If spillovers take place within neighborhoods, then strategic interactions affect neighborhood formation, human capital of different ethnic groups, and overall inequality (Borjas 1993, 1996, Benabou 1993, 1996, Durlauf 2002, 1999, 1996). These models often feature multiple equilibria and sensitivity to initial conditions. Although the theory is well developed, there has been only limited empirical testing of strategic interactions and sensitivity to initial conditions.
One of the most famous models of strategic interaction in economics is Thomas Schelling’s (1971) elegant model of racial segregation (see its coverage in Dixit and Nalebuff 1991, for example). He shows how only a modest preference of whites to live next to other whites could result in nearly complete residential segregation, because of the instability of intermediate points where one agent’s residential location depends on the actions of other agents in the neighborhood. In this model, even a relatively small fraction of nonwhites could cause the neighborhood to “tip” from completely white to completely nonwhite. The fraction at which this happens is called the “tipping point.”
