On the Dynamics of Information, Coordination and Regime Change
This paper examines how the dynamics of information influences the dynamics of coordination in an environment with strategic complementarities and heterogeneous expectations. We consider a simple dynamic global game of regime change, in which the status quo is abandoned when a sufficiently large fraction of agents attacks it. Applications include bank runs, currency crises, revolutions, and political reforms. We show that the occurrence of coordinated attacks and the timing of regime change depend, not only on the evolution of information, but also on arbitrary self-fulfilling expectations. Despite the indeterminacy in short-run dynamics, long-run outcomes are driven by fundamentals: There is a unique threshold below which regime change is inevitable in the long run. Moreover, all equilibrium paths are characterized by the succession of short phases of high risk of a crisis and long phases of tranquility, which may explain why phenomena such as speculative attacks and revolutions appear as spikes in economic or social activity.
|Date of creation:||2004|
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