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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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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.91.1.208
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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. Howitt, Peter & McAfee, R Preston, 1992. "Animal Spirits," American Economic Review, American Economic Association, vol. 82(3), pages 493-507, June.
  2. Carlsson, H. & Van Damme, E., 1990. "Global Games And Equilibrium Selection," Papers 9052, Tilburg - Center for Economic Research.
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  8. Monderer, Dov & Samet, Dov, 1989. "Approximating common knowledge with common beliefs," Games and Economic Behavior, Elsevier, vol. 1(2), pages 170-190, June.
  9. P. Diamond, 1980. "Aggregate Demand Management in Search Equilibrium," Working papers 268, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. Shin, Hyun Song & Williamson, Timothy, 1996. "How Much Common Belief Is Necessary for a Convention?," Games and Economic Behavior, Elsevier, vol. 13(2), pages 252-268, April.
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