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Coordination Cycles

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  • Jakub Steiner

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.

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Bibliographic Info

Paper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number wp274.

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Date of creation: Sep 2005
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Handle: RePEc:cer:papers:wp274

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Keywords: Coordination; crises; cycles and fluctuations; equilibrium Uniqueness; global games.;

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  1. Frankel, David M. & Burdzy, Krzysztof, 2005. "Shocks and Business Cycles," Staff General Research Papers, Iowa State University, Department of Economics 12274, Iowa State University, Department of Economics.
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Citations

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Cited by:
  1. GUIMARAES, Bernardo & ARAUJO, Luis, 2013. "The effect of options on coordination," Textos para discussão 324, Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil).
  2. Steiner, Jakub, 2008. "Coordination of mobile labor," Journal of Economic Theory, Elsevier, Elsevier, vol. 139(1), pages 25-46, March.
  3. Ordoñez, Guillermo L., 2013. "Fragility of reputation and clustering of risk-taking," Theoretical Economics, Econometric Society, Econometric Society, vol. 8(3), September.
  4. Flavio Toxvaerd, 2004. "Strategic Merger Waves: A Theory of Musical Chairs," Discussion Paper Series, The Center for the Study of Rationality, Hebrew University, Jerusalem dp359, The Center for the Study of Rationality, Hebrew University, Jerusalem.
  5. Giannitsarou, Chryssi & Toxvaerd, Flavio, 2007. "Recursive Global Games," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6470, C.E.P.R. Discussion Papers.
  6. Jakub Steiner, 2006. "Coordination in a Mobile World," CERGE-EI Working Papers, The Center for Economic Research and Graduate Education - Economic Institute, Prague wp295, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  7. Huanxing Yang, 2010. "Information aggregation and investment cycles with strategic complementarity," Economic Theory, Springer, Springer, vol. 43(2), pages 281-311, May.
  8. Oh, Frederick Dongchuhl, 2013. "Contagion of a liquidity crisis between two firms," Journal of Financial Economics, Elsevier, Elsevier, vol. 107(2), pages 386-400.

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