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Risk-sharing and crises. Global games of regime change with endogenous wealth

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  • Campos, Rodolfo G.

Abstract

I add heterogeneous agents and risk-sharing opportunities to a global game of regime change. The novel insight is that when there is a risk-sharing motive, fundamentals drive not only individual behavior, but also select which individuals are more relevant for the likelihood of a crisis because of endogenous shifts in wealth. If attacking is relatively safe, attack behavior in the global game and trade in state-contingent assets feed back into each other. This feedback implies that multiple equilibria may exist even if signal noise becomes arbitrarily small. In addition, heterogeneity in risk-aversion within the population amplifies the influence of the state of the economy on the probability of a crisis.

Suggested Citation

  • Campos, Rodolfo G., 2013. "Risk-sharing and crises. Global games of regime change with endogenous wealth," Journal of Economic Theory, Elsevier, vol. 148(4), pages 1624-1658.
  • Handle: RePEc:eee:jetheo:v:148:y:2013:i:4:p:1624-1658 DOI: 10.1016/j.jet.2013.04.007
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    Keywords

    Global games; Risk-aversion; Heterogeneous agents; Risk-sharing; Financial crises; Strategic risk;

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G2 - Financial Economics - - Financial Institutions and Services
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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