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Crises: Equilibrium Shifts and Large Shocks

Author

Listed:
  • Stephen Morris
  • Muhamet Yildiz

Abstract

We study the informational events that trigger equilibrium shifts in coordination games with incomplete information. Assuming that the distribution of the changes in fundamentals has fat tails, we show that majority play shifts either if fundamentals reach a critical threshold or if there are large common shocks, even before the threshold is reached. The fat-tail assumption matters because it implies that large shocks make players more unsure about whether their payoffs are higher than others. This feature is crucial for large shocks to matter.

Suggested Citation

  • Stephen Morris & Muhamet Yildiz, 2019. "Crises: Equilibrium Shifts and Large Shocks," American Economic Review, American Economic Association, vol. 109(8), pages 2823-2854, August.
    • Handle: RePEc:aea:aecrev:v:109:y:2019:i:8:p:2823-54
    Note: DOI: 10.1257/aer.20170159
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    1. repec:osf:socarx:ymzrd_v1 is not listed on IDEAS
    2. Kets, Willemien & Kager, Wouter & Sandroni, Alvaro, 2022. "The value of a coordination game," Journal of Economic Theory, Elsevier, vol. 201(C).
    3. Chanelle Duley & Prasanna Gai, 2020. "When the penny doesn't drop - Macroeconomic tail risk and currency crises," National Institute of Economic and Social Research (NIESR) Discussion Papers 520, National Institute of Economic and Social Research.
    4. Willemien Kets & Alvaro Sandroni, 2021. "A Theory of Strategic Uncertainty and Cultural Diversity," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(1), pages 287-333.
    5. Balbus, Lukasz & Dziewulski, Pawel & Reffett, Kevin & Wozny, Lukasz, 2022. "Markov distributional equilibrium dynamics in games with complementarities and no aggregate risk," Theoretical Economics, Econometric Society, vol. 17(2), May.
    6. Xiaosheng Mu & Luciano Pomatto & Philipp Strack & Omer Tamuz, 2020. "Background risk and small-stakes risk aversion," Papers 2010.08033, arXiv.org, revised Mar 2021.
    7. Min Zhang, 2020. "Non-Monotone Social Learning," Discussion Paper Series, School of Economics and Finance 202008, School of Economics and Finance, University of St Andrews.
    8. Isabel Trevino, 2020. "Informational Channels of Financial Contagion," Econometrica, Econometric Society, vol. 88(1), pages 297-335, January.
    9. Zhang, Min, 2021. "Non-monotone social learning," Journal of Economic Behavior & Organization, Elsevier, vol. 185(C), pages 565-579.
    10. Rongyu Wang, 2025. "Currency Attacks with Information Correlation," Annals of Economics and Finance, Society for AEF, vol. 26(2), pages 825-852, November.
    11. Stefano Giglio & Matteo Maggiori & Johannes Stroebel & Stephen Utkus, 2020. "Inside the Mind of a Stock Market Crash," CESifo Working Paper Series 8334, CESifo.
    12. Khan, Nokhaiz Tariq & Hanbali, Ahmad Al & Demir, Emrah & Kim, Yunbae, 2025. "Beyond lotka-volterra: A game-theoretic exploration of two-dimensional airline competition," Transportation Research Part A: Policy and Practice, Elsevier, vol. 200(C).
    13. Chanelle Duley & Prasanna Gai, 2023. "Macroeconomic tail risk, currency crises and the inter‐war gold standard," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 56(4), pages 1551-1582, November.
    14. Willem L. Heeringa & Job Swank, 2019. "Heterogeneous Consumers, Credit Rationing, and Tax-Benefit Policies," De Economist, Springer, vol. 167(2), pages 105-126, June.

    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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