Sand in the Wheels: A Dynamic Global-Game Approach

CERGE-EI Working Paper Series No. 459

49 Pages Posted: 27 Apr 2012

See all articles by Laurent Mathevet

Laurent Mathevet

University of Texas at Austin

Jakub Steiner

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

Date Written: April 1, 2012

Abstract

We study the impact of frictions on the prevalence of systemic crises. Agents privately learn about a fixed payoff parameter, and repeatedly adjust their investments while facing transaction costs in a dynamic global game. The model has a rich structure of externalities: payoffs may depend on the volume of aggregate investment, on the concentration of investment, or on its volatility. We examine how small frictions, including those similar to the Tobin tax, affect the equilibrium. We identify conditions under which frictions discourage harmful behavior without compromising investment volume. The analysis is driven by a robust invariance result: the volume of aggregate investment (measured in a pivotal contingency) is invariant to a large family of frictions.

Suggested Citation

Mathevet, Laurent and Steiner, Jakub, Sand in the Wheels: A Dynamic Global-Game Approach (April 1, 2012). CERGE-EI Working Paper Series No. 459, Available at SSRN: https://ssrn.com/abstract=2046943 or http://dx.doi.org/10.2139/ssrn.2046943

Laurent Mathevet (Contact Author)

University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

Jakub Steiner

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute) ( email )

P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic
+420 605 286 947 (Phone)

HOME PAGE: http://www.cerge-ei.cz

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