CERGE-EI Working Paper No. 274
31 Pages Posted: 8 Feb 2006
Date Written: September 2005
We build a dynamic global game in which players repeatedly face a similar coordination problem. By choosing a risky action (invest) instead of an outside option (not invest), players risk instantaneous losses as well as payoffs from future stages, in which they cannot participate if they go bankrupt. Thus, the total strategic risk associated with investment in a particular stage depends on the expected continuation payoff. High expected future payoffs make investment today more risky and therefore harder to coordinate on, which decreases today's payoff. Expectation of successful coordination tomorrow undermines successful coordination today which leads to fluctuations of equilibrium behavior even if the underlying economic fundamentals happen to be stationary. The dynamic game inherits the equilibrium uniqueness of static global games.
Keywords: Coordination, Crises, Cycles and Fluctuations, Equilibrium Uniqueness, Global Games
JEL Classification: C72, C73 D8, E32
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