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Sand in the Wheels: A Dynamic Global-Game Approach

  • Laurent Mathevet
  • Jakub Steiner

We study the impact of frictions on the prevalence of systemic crises. Agents privately learn about a fixed payoff parameter, and repeatedly adjust their investments while facing transaction costs in a dynamic global game. The model has a rich structure of externalities: payoffs may depend on the volume of aggregate investment, on the concentration of investment, or on its volatility. We examine how small frictions, including those similar to the Tobin tax, affect the equilibrium. We identify conditions under which frictions discourage harmful behavior without compromising investment volume. The analysis is driven by a robust invariance result: the volume of aggregate investment (measured in a pivotal contingency) is invariant to a large family of frictions.

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Paper provided by The Center for Economic Research and Graduate Education - Economics Institute, Prague in its series CERGE-EI Working Papers with number wp459.

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Date of creation: Apr 2012
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Handle: RePEc:cer:papers:wp459
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  1. James Tobin, 1978. "A Proposal for International Monetary Reform," Cowles Foundation Discussion Papers 506, Cowles Foundation for Research in Economics, Yale University.
  2. Carlin, Wendy & Mayer, Colin, 2003. "Finance, investment, and growth," Journal of Financial Economics, Elsevier, vol. 69(1), pages 191-226, July.
  3. Bernardo Guimaraes & Stephen Morris, 2006. "Risk and Wealth in a Model of Self-Fulfilling Currency Attacks," Levine's Bibliography 122247000000001115, UCLA Department of Economics.
  4. George-Marios Angeletos & Ivan Werning, 2004. "Crises and Prices: Information Aggregation, Multiplicity and Volatility," NBER Working Papers 11015, National Bureau of Economic Research, Inc.
  5. Echenique, Federico, 2004. "Extensive-form games and strategic complementarities," Games and Economic Behavior, Elsevier, vol. 46(2), pages 348-364, February.
  6. Eugen Kovac & Jakub Steiner, 2008. "Reversibility in Dynamic Coordination Problems," ESE Discussion Papers 183, Edinburgh School of Economics, University of Edinburgh.
  7. Sylvain Chassang, 2010. "Fear of Miscoordination and the Robustness of Cooperation in Dynamic Global Games With Exit," Econometrica, Econometric Society, vol. 78(3), pages 973-1006, 05.
  8. David M. Frankel & Stephen Morris & Ady Pauzner, 2001. "Equilibrium Selection in Global Games with Strategic Complementarities," Cowles Foundation Discussion Papers 1336, Cowles Foundation for Research in Economics, Yale University.
  9. George-Marios Angeletos & Christian Hellwig & Alessandro Pavan, 2007. "Dynamic Global Games of Regime Change: Learning, Multiplicity, and the Timing of Attacks," Econometrica, Econometric Society, vol. 75(3), pages 711-756, 05.
  10. George-Marios Angeletos & Alessandro Pavan, 2007. "Dynamic Global Games of Regime Change: Learning, Multiplicity and Timing of Attacks," Discussion Papers 1497, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  11. Jakub Steiner, 2006. "Coordination of Mobile Labor," ESE Discussion Papers 152, Edinburgh School of Economics, University of Edinburgh.
  12. Dasgupta, Amil, 2007. "Coordination and delay in global games," Journal of Economic Theory, Elsevier, vol. 134(1), pages 195-225, May.
  13. Frankel, David M. & Burdzy, Krzysztof & Pauzner, Ady, 2001. "Fast Equilibrium Selection by Rational Players Living in a Changing World," Staff General Research Papers 11923, Iowa State University, Department of Economics.
  14. Hans Carlsson & Eric van Damme, 1993. "Global Games and Equilibrium Selection," Levine's Working Paper Archive 122247000000001088, David K. Levine.
  15. repec:oup:restud:v:78:y:2011:i:1:p:263-292 is not listed on IDEAS
  16. Fudenberg, Drew & Levine, David K., 1988. "Open-loop and closed-loop equilibria in dynamic games with many players," Journal of Economic Theory, Elsevier, vol. 44(1), pages 1-18, February.
  17. Christophe Chamley, 2003. "Dynamic Speculative Attacks," American Economic Review, American Economic Association, vol. 93(3), pages 603-621, June.
  18. Xavier Vives, 2009. "Strategic complementarity in multi-stage games," Economic Theory, Springer, vol. 40(1), pages 151-171, July.
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