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Who Matters in Coordination Problems?

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  • Steiner, Jakub
  • Sakovics, Jozsef

Abstract

We consider a common investment project that is vulnerable to a self-ful lling 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 di erent 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 di erent payo types. Applying this nding, we show that agents who bene t little from the project's success have a large impact on the coordination process. The agents with small bene ts 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 in uential because they modify their equilibrium behavior only if the others change theirs substantially.

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Paper provided by Scottish Institute for Research in Economics (SIRE) in its series SIRE Discussion Papers with number 2008-27.

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Date of creation: 2008
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Handle: RePEc:edn:sirdps:40

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  1. Guimaraes, Bernardo & Morris, Stephen, 2007. "Risk and wealth in a model of self-fulfilling currency attacks," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2205-2230, November.
  2. Giancarlo Corsetti & Amil Dasgupta & Stephen Morris & Hyun Song Shin, 2001. "Does one Soros make a difference?: a theory of currency crises with large and small traders," LSE Research Online Documents on Economics 25045, London School of Economics and Political Science, LSE Library.
  3. Dasgupta, Amil, 2007. "Coordination and delay in global games," Journal of Economic Theory, Elsevier, vol. 134(1), pages 195-225, May.
  4. Giancarlo Corsetti & Amil Dasgupta & Stephen Morris & Shin, Hyun, 2000. "Does One Soros Make a Difference? A Theory of Currency Crises with Large and Small Traders," Cowles Foundation Discussion Papers 1273, Cowles Foundation for Research in Economics, Yale University.
  5. Carlsson, H. & Van Damme, E., 1990. "Global Games And Equilibrium Selection," Papers 9052, Tilburg - Center for Economic Research.
  6. Stephen Morris & Hyun Song Shin, 1999. "Coordination Risk and the Price of Debt," Cowles Foundation Discussion Papers 1241, Cowles Foundation for Research in Economics, Yale University.
  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. Morris, Stephen & Shin, Hyun Song, 1998. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," American Economic Review, American Economic Association, vol. 88(3), pages 587-97, June.
  9. Sah, R.K., 1990. "Social Osmosis And Patterns Of Crime: A Dynamic Economic Analysis," Papers 609, Yale - Economic Growth Center.
  10. 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.
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Cited by:
  1. Christian Basteck & Tijmen R. Daniëls & Frank Heinemann, 2010. "Characterising Equilibrium Selection in Global Games with Strategic Complementarities," SFB 649 Discussion Papers SFB649DP2010-008, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  2. Dong Beom Choi, 2013. "Heterogeneity and stability: bolster the strong, not the weak," Staff Reports 637, Federal Reserve Bank of New York.
  3. Alex Edmans & Itay Goldstein & John Y. Zhu, 2011. "Contracting With Synergies," NBER Working Papers 17606, National Bureau of Economic Research, Inc.
  4. Kováč, Eugen & Steiner, Jakub, 2013. "Reversibility in dynamic coordination problems," Games and Economic Behavior, Elsevier, vol. 77(1), pages 298-320.
  5. Lucian A. Bebchuk & Itay Goldstein, 2010. "Self-Fulfilling Credit Market Freezes," NBER Working Papers 16031, National Bureau of Economic Research, Inc.
  6. Guimaraes, Bernardo & Machado, Caio, 2013. "Demand expectations and the timing of stimulus policies," MPRA Paper 48895, University Library of Munich, Germany.
  7. Vives, Xavier, 2011. "Strategic Complementarity, Fragility, and Regulation," CEPR Discussion Papers 8444, C.E.P.R. Discussion Papers.
  8. Nikolas Tsakas, 2013. "Diffusion by Imitation: The Importance of Targeting Agents," 2013 Papers pts99, Job Market Papers.
  9. 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.
  10. Gary Biglaiser & Jacques CreÌmer & AndreÌ Veiga, 2013. "Migration Between Platforms," Working Papers 13-18, NET Institute.

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