Coordination Failure in Investment, Economic Growth, and Volatility

This paper applies global games to the study of an economy with investment complementarities and heterogeneous private information. I establish a two-sector OLG model in which capital goods can be produced by two technologies. One is a safe technology with a publicly known constant return. The other is a risky technology exhibiting technological externalities with an uncertain return about which economic agents have heterogeneous private information. I find that coordination failure arises, and is most severe when the returns of the safe and risky technologies are close. I also find that more precise private information does not necessarily improve social welfare, while more precise public information can unambiguously improve social welfare. Moreover, risk attitudes of economic agents can affect the economy, inducing a positive relationship between economic growth and volatility. Last, I find that a subsidy on the risky technology investment can greatly alleviate coordination failure and improve social welfare.