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Risk-Sharing and Crises. Global Games of Regime Change with Endogenous Wealth

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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.

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  • Campos, Rolf, 2013. "Risk-Sharing and Crises. Global Games of Regime Change with Endogenous Wealth," IESE Research Papers D/1064, IESE Business School.
    • Handle: RePEc:ebg:iesewp:d-1064
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    More about this item

    Keywords

    global games; risk-aversion; heterogeneous agents; risk-sharing; financial crises; strategic risk;
    All these keywords.

    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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