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Tractable dynamic global games and applications

  • Mathevet, Laurent
  • Steiner, Jakub

We present a family of tractable dynamic global games and its applications. Agents privately learn about a fixed fundamental, and repeatedly adjust their investments while facing frictions. The game exhibits many externalities: payoffs may depend on the volume of investment, on its volatility, and on its concentration. The solution is driven by an invariance result: aggregate investment is (in a pivotal contingency) invariant to a large family of frictions. We use the invariance result to examine how frictions, including those similar to the Tobin tax, affect equilibrium. We identify conditions under which frictions discourage harmful behavior without compromising investment volume.

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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 148 (2013)
Issue (Month): 6 ()
Pages: 2583-2619

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Handle: RePEc:eee:jetheo:v:148:y:2013:i:6:p:2583-2619
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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