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Who Matters in Coordination Problems?

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Abstract

We consider a common investment project that is vulnerable to a self-fulfilling coordination failure and hence is strategically risky. Based on their private information, agents { who have heterogeneous investment incentives - form expectations or "sentiments" about the project's outcome. We find that the sum of these sentiments is constant across different strategy profiles and it is independent of the distribution of incentives. As a result, we can think of sentiment as a scarce resource divided up among the different payoff types. Applying this finding, we show that agents who benefit little from the project's success have a large impact on the coordination process. The agents with small benefits invest only if their sentiment towards the project is large per unit investment cost. As the average sentiment is constant, a subsidy decreasing the investment costs of these agents will "free up" a large amount of sentiment, provoking a large impact on the whole economy. Intuitively, these agents, insensitive to the project's outcome and hence to the actions of others, are influential because they modify their equilibrium behavior only if the others change theirs substantially.

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Bibliographic Info

Paper provided by Edinburgh School of Economics, University of Edinburgh in its series ESE Discussion Papers with number 190.

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Length: 27
Date of creation: 22 Jun 2009
Date of revision:
Handle: RePEc:edn:esedps:190

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Keywords: Heterogeneous Agents; Global Games; Poverty Traps; Strategic Complementarity; Representative Agent.;

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  1. Morris, S & Song Shin, H, 1996. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," Economics Papers 126, Economics Group, Nuffield College, University of Oxford.
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  5. Stephen Morris & Hyun Song Shin, 2001. "Coordination risk and the price of debt," LSE Research Online Documents on Economics 25046, London School of Economics and Political Science, LSE Library.
  6. Corsetti, Giancarlo & Dasgupta, Amil & Morris, Stephen & Shin, Hyun Song, 2000. "Does One Soros Make a Difference? A Theory of Currency Crises with Large and Small Traders," CEPR Discussion Papers 2610, C.E.P.R. Discussion Papers.
  7. David M. Frankel & Stephen Morris & Ady Pauzner, 2000. "Equilibrium Selection in Global Games with Strategic Complementarities," Econometric Society World Congress 2000 Contributed Papers 1490, Econometric Society.
  8. Itay Goldstein & Ady Pauzner, 2005. "Demand-Deposit Contracts and the Probability of Bank Runs," Journal of Finance, American Finance Association, vol. 60(3), pages 1293-1327, 06.
  9. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
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Cited by:
  1. Gary Biglaiser & Jacques CreÌmer & AndreÌ Veiga, 2013. "Migration Between Platforms," Working Papers 13-18, NET Institute.
  2. Alex Edmans & Itay Goldstein & John Y. Zhu, 2011. "Contracting With Synergies," NBER Working Papers 17606, National Bureau of Economic Research, Inc.
  3. Guimaraes, Bernardo & Machado, Caio, 2013. "Demand expectations and the timing of stimulus policies," MPRA Paper 48895, University Library of Munich, Germany.
  4. Kováč, Eugen & Steiner, Jakub, 2013. "Reversibility in dynamic coordination problems," Games and Economic Behavior, Elsevier, vol. 77(1), pages 298-320.
  5. Vives, Xavier, 2011. "Strategic complementarity, fragility, and regulation," IESE Research Papers D/928, IESE Business School.
  6. Basteck, Christian & Daniëls, Tijmen R. & Heinemann, Frank, 2013. "Characterising equilibrium selection in global games with strategic complementarities," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2620-2637.
  7. Dong Beom Choi, 2013. "Heterogeneity and stability: bolster the strong, not the weak," Staff Reports 637, Federal Reserve Bank of New York.
  8. Lucian A. Bebchuk & Itay Goldstein, 2010. "Self-Fulfilling Credit Market Freezes," NBER Working Papers 16031, National Bureau of Economic Research, Inc.
  9. Nikolas Tsakas, 2013. "Diffusion by Imitation: The Importance of Targeting Agents," 2013 Papers pts99, Job Market Papers.
  10. Campos, Rodolfo G., 2013. "Risk-sharing and crises. Global games of regime change with endogenous wealth," Journal of Economic Theory, Elsevier, vol. 148(4), pages 1624-1658.

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