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Coordination cycles

  • Steiner, Jakub

Players repeatedly face a coordination problem in a dynamic global game. By choosing a risky action (invest) instead of waiting, players risk instantaneous losses as well as a loss of payoffs from future stages, in which they cannot participate if they go bankrupt. Thus, the total strategic risk associated with investment in a particular stage depends on the expected continuation payoff. High continuation payoff makes investment today more risky and therefore harder to coordinate on, which decreases today's payoff. Thus, expectation of successful coordination tomorrow undermines successful coordination today, which leads to fluctuations of equilibrium behavior even if the underlying economic fundamentals happen to be the same across the rounds. The dynamic game inherits the equilibrium uniqueness of the underlying static global game.

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Article provided by Elsevier in its journal Games and Economic Behavior.

Volume (Year): 63 (2008)
Issue (Month): 1 (May)
Pages: 308-327

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Handle: RePEc:eee:gamebe:v:63:y:2008:i:1:p:308-327
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622836

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