Equilibrium Coordination with Discretionary Policy Making

Discretionary policy makers cannot manage private†sector expectations and cannot coordinate the actions of future policy makers. As a consequence, coordination failures can occur and multiple equilibria can arise. In this article, we employ notions of self†enforceability and learnability to motivate and identify equilibria of particular interest in discretionary policy problems exhibiting multiple equilibria. Central among these criteria are whether an equilibrium is robust to the formation of coalitions, and whether it is learnable by private agents and jointly learnable by private agents and the policy maker. Unless the Pareto†preferred equilibrium is learnable by private agents, we find little reason to expect coordination on that equilibrium.