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Coordination Cycles

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Abstract

Players repeatedly face a coordination problem in a dynamic global game. By choosing a risky action (invest) instead of waiting, players risk instantaneous losses as well as a loss of 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 continuation payoff makes investment today more risky and therefore harder to coordinate on, which decreases today’s payoff. Thus, 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 the same across the rounds. The dynamic game inherits the equilibrium uniqueness of the underlying static global game.

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Bibliographic Info

Paper provided by Edinburgh School of Economics, University of Edinburgh in its series ESE Discussion Papers with number 162.

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Length: 30
Date of creation: Aug 2006
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Handle: RePEc:edn:esedps:162

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Keywords: Coordination; Crises; Cycles and Fluctuations; Equilibrium Uniqueness; Global Games.;

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Cited by:
  1. Jakub Steiner, 2006. "Coordination of Mobile Labor," ESE Discussion Papers 152, Edinburgh School of Economics, University of Edinburgh.
  2. Flavio Toxvaerd & Chryssi Giannitsarou, 2004. "Recursive global games," Money Macro and Finance (MMF) Research Group Conference 2003 104, Money Macro and Finance Research Group.
  3. Flavio Toxvaerd, 2004. "Strategic Merger Waves: A Theory of Musical Chairs," Discussion Paper Series dp359, The Center for the Study of Rationality, Hebrew University, Jerusalem.
  4. Araujo, Luis & Guimarães, Bernardo, 2013. "The effect of options on coordination," CEPR Discussion Papers 9294, C.E.P.R. Discussion Papers.
  5. Huanxing Yang, 2010. "Information aggregation and investment cycles with strategic complementarity," Economic Theory, Springer, vol. 43(2), pages 281-311, May.
  6. Oh, Frederick Dongchuhl, 2013. "Contagion of a liquidity crisis between two firms," Journal of Financial Economics, Elsevier, vol. 107(2), pages 386-400.
  7. Guillermo Ordonez, 2008. "Fragility of Reputation and Clustering in Risk Taking," 2008 Meeting Papers 441, Society for Economic Dynamics.

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