Coordination Cycles

CERGE-EI Working Paper No. 274

31 Pages Posted: 8 Feb 2006

See all articles by Jakub Steiner

Jakub Steiner

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

Date Written: September 2005

Abstract

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

Suggested Citation

Steiner, Jakub, Coordination Cycles (September 2005). CERGE-EI Working Paper No. 274, Available at SSRN: https://ssrn.com/abstract=881747 or http://dx.doi.org/10.2139/ssrn.881747

Jakub Steiner (Contact Author)

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

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