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Recurrent crises in global games

  • Frankel, David M.
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    Global games have unique equilibria in which aggregate behavior changes sharply when an underlying random fundamental crosses some threshold. This property relies on the existence of dominance regions: all players have a highest and lowest action that, for some fundamentals, is strictly dominant. But if the fundamental follows a random walk, it eventually spends nearly all of its time in these regions: crises gradually disappear. We obtain recurring crises by adding a single large player who lacks dominance regions. We also show that in order to obtain recurring crises, one must either relax dominance regions or restrict to fundamentals that continually return to or cross over a fixed region.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0304406812000523
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    Article provided by Elsevier in its journal Journal of Mathematical Economics.

    Volume (Year): 48 (2012)
    Issue (Month): 5 ()
    Pages: 309-321

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    Handle: RePEc:eee:mateco:v:48:y:2012:i:5:p:309-321
    Contact details of provider: Web page: http://www.elsevier.com/locate/jmateco

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