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Local Discouragement and Global Collapse: A Theory of Coordination Avalanches

  • Curtis R. Taylor
  • Thomas D. Jeitschko

We study a dynamic game in which all players initially possess the same information and coordinate on a high level of activity. Eventually, players with a long string of bad experiences become inactive. This prospect can cause a coordination avalanche in which all activity in the population stops. Coordination avalanches are part of Pareto-efficient equilibria; they can occur at any point in the game; their occurrence does not depend on the true state of nature; and allowing players to exchange information may merely hasten their onset. We present applications to search markets, organizational meltdown, and inefficient computer upgrades.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 91 (2001)
Issue (Month): 1 (March)
Pages: 208-224

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Handle: RePEc:aea:aecrev:v:91:y:2001:i:1:p:208-224
Note: DOI: 10.1257/aer.91.1.208
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  1. Caplin, A. & Leahy, J., 1992. "Business as Usual, Market Crashes, and Wisdom after the Fact," Harvard Institute of Economic Research Working Papers 1594, Harvard - Institute of Economic Research.
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  8. Rubinstein, Ariel, 1989. "The Electronic Mail Game: Strategic Behavior under "Almost Common Knowledge."," American Economic Review, American Economic Association, vol. 79(3), pages 385-91, June.
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