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Local Discouragement and Global Collapse: A Theory of Coordination Avalanches

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  • Curtis R. Taylor
  • Thomas D. Jeitschko

Abstract

We study a dynamic game in which all players initially possess the same information and coordinate on a high level of activity. Eventually, players with a long string of bad experiences become inactive. This prospect can cause a coordination avalanche in which all activity in the population stops. Coordination avalanches are part of Pareto-efficient equilibria; they can occur at any point in the game; their occurrence does not depend on the true state of nature; and allowing players to exchange information may merely hasten their onset. We present applications to search markets, organizational meltdown, and inefficient computer upgrades.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 91 (2001)
Issue (Month): 1 (March)
Pages: 208-224

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Handle: RePEc:aea:aecrev:v:91:y:2001:i:1:p:208-224

Note: DOI: 10.1257/aer.91.1.208
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  1. P. Diamond, 1980. "Aggregate Demand Management in Search Equilibrium," Working papers 268, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Wolfgang Pesendorfer & Jeroen M. Swinkels, 1996. "Efficiency and Information Aggregation in Auctions," Discussion Papers 1168, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Christophe Chamley, 1999. "Coordinating Regime Switches," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 869-905, August.
  4. Howitt, P. & Mcfee, R.P., 1990. "Animal Spirits," UWO Department of Economics Working Papers 9005, University of Western Ontario, Department of Economics.
  5. Caplin, Andrew & Leahy, John, 1994. "Business as Usual, Market Crashes, and Wisdom after the Fact," American Economic Review, American Economic Association, vol. 84(3), pages 548-65, June.
  6. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 2010. "A theory of Fads, Fashion, Custom and cultural change as informational Cascades," Levine's Working Paper Archive 1193, David K. Levine.
  7. Carlsson, H. & Van Damme, E., 1990. "Global Games And Equilibrium Selection," Papers 9052, Tilburg - Center for Economic Research.
  8. Monderer, Dov & Samet, Dov, 1989. "Approximating common knowledge with common beliefs," Games and Economic Behavior, Elsevier, vol. 1(2), pages 170-190, June.
  9. Cooper, Russell & John, Andrew, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, MIT Press, vol. 103(3), pages 441-63, August.
  10. Rubinstein, Ariel, 1989. "The Electronic Mail Game: Strategic Behavior under "Almost Common Knowledge."," American Economic Review, American Economic Association, vol. 79(3), pages 385-91, June.
  11. Shin, Hyun Song & Williamson, Timothy, 1996. "How Much Common Belief Is Necessary for a Convention?," Games and Economic Behavior, Elsevier, vol. 13(2), pages 252-268, April.
  12. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 797-817, August.
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Cited by:
  1. Dan Levin & James Peck, 2005. "Investment Dynamics with Common and Private Values," Levine's Bibliography 666156000000000607, UCLA Department of Economics.
  2. Haibin Zhu, 2001. "Bank runs without self-fulfilling prophecies," BIS Working Papers 106, Bank for International Settlements.
  3. Mathias Drehmann & Jörg Oechssler & Andreas Roider, 2004. "Herding with and without Payoff Externalities - An Internet Experiment," Bonn Econ Discussion Papers bgse15_2004, University of Bonn, Germany.
  4. repec:clg:wpaper:2009-14 is not listed on IDEAS
  5. Guarino, Antonio & Huck, Steffen & Jeitschko, Thomas D., 2004. "Can fear cause economic collapse? Insights from an experimental study," Discussion Papers, Research Unit: Market Processes and Governance SP II 2004-05, Social Science Research Center Berlin (WZB).
  6. Huberto M. Ennis, 2005. "Complementariedades y Política Macroeconómica," Department of Economics, Working Papers 054, Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata.
  7. Stephen Morris & Hyun Song Shin, 2000. "Global Games: Theory and Applications," Cowles Foundation Discussion Papers 1275, Cowles Foundation for Research in Economics, Yale University.
  8. Haibin Zhu, 2001. "Bank runs, welfare and policy implications," BIS Working Papers 107, Bank for International Settlements.
  9. Gong, Zheng & Tian, Feng & Xu, Boyan, 2013. "Limited Information Aggregation and Externalities - A Simple Model of Metastable Market," MPRA Paper 52143, University Library of Munich, Germany.
  10. Guarino, Antonio & Huck, Steffen & Jeitschko, Thomas D., 2006. "Averting economic collapse and the solipsism bias," Games and Economic Behavior, Elsevier, vol. 57(2), pages 264-285, November.
  11. Huanxing Yang, 2010. "Information aggregation and investment cycles with strategic complementarity," Economic Theory, Springer, vol. 43(2), pages 281-311, May.

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