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Who Matters in Coordination Problems?

We consider a common investment project that is vulnerable to a self-fulfilling coordination failure and hence is strategically risky. Based on their private information, agents - who have heterogeneous investment incentives - form expectations or "sentiments" about the project's outcome. We find that the sum of these sentiments is constant across different strategy profiles and it is independent of the distribution of incentives. As a result, we can think of sentiment as a scarce resource divided up among the different payoff types. Applying this finding, we show that agents who benefit little from the project's success have a large impact on the coordination process. The agents with small benefits invest only if their sentiment towards the project is large per unit investment cost. As the average sentiment is constant, a subsidy decreasing the investment costs of these agents will "free up" a large amount of sentiment, provoking a large impact on the whole economy. Intuitively, these agents, insensitive to the project's outcome and hence to the actions of others, are influential because they modify their equilibrium behavior only if the others change theirs substantially.

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Paper provided by Edinburgh School of Economics, University of Edinburgh in its series ESE Discussion Papers with number 190.

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Length: 27
Date of creation: 18 Jun 2009
Date of revision:
Handle: RePEc:edn:esedps:190
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  1. Stephen Morris & Hyun Song Shin, 2001. "Coordination risk and the price of debt," LSE Research Online Documents on Economics 25046, London School of Economics and Political Science, LSE Library.
  2. Giancarlo Corsetti & Amil Dasgupta & Stephen Morris & Hyun Song Shin, 2001. "Does one Soros make a difference?: a theory of currency crises with large and small traders," LSE Research Online Documents on Economics 25045, London School of Economics and Political Science, LSE Library.
  3. Stephen Morris & Bernardo Guimaraes, 2004. "Risk and Wealth in a Model of Self-Fulfilling Currency Attacks," Yale School of Management Working Papers ysm424, Yale School of Management.
  4. Itay Goldstein & Ady Pauzner, 2005. "Demand-Deposit Contracts and the Probability of Bank Runs," Journal of Finance, American Finance Association, vol. 60(3), pages 1293-1327, 06.
  5. Hans Carlsson & Eric van Damme, 1993. "Global Games and Equilibrium Selection," Levine's Working Paper Archive 122247000000001088, David K. Levine.
  6. David M. Frankel & Stephen Morris & Ady Pauzner, 2000. "Equilibrium Selection in Global Games with Strategic Complementarities," Econometric Society World Congress 2000 Contributed Papers 1490, Econometric Society.
  7. Morris, S & Song Shin, H, 1996. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," Economics Papers 126, Economics Group, Nuffield College, University of Oxford.
  8. Dasgupta, Amil, 2007. "Coordination and delay in global games," Journal of Economic Theory, Elsevier, vol. 134(1), pages 195-225, May.
  9. Sah, Raaj K, 1991. "Social Osmosis and Patterns of Crime," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1272-95, December.
  10. Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-41, August.
  11. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
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