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Sand in the Wheels: A Dynamic Global-Game Approach

  • Jakub Steiner

    (Northwestern University)

  • Laurent Mathevet

    (University of Texas at Austin)

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 Society for Economic Dynamics in its series 2012 Meeting Papers with number 123.

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Date of creation: 2012
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Handle: RePEc:red:sed012:123
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  1. Bernardo Guimaraes & Stephen Morris, 2005. "Risk and Wealth in a Model of Self-Fulfilling Currency Attacks," Levine's Bibliography 122247000000000790, UCLA Department of Economics.
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  10. James Tobin, 1978. "A Proposal for International Monetary Reform," Cowles Foundation Discussion Papers 506, Cowles Foundation for Research in Economics, Yale University.
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  13. 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.
  14. Steiner, Jakub, 2008. "Coordination of mobile labor," Journal of Economic Theory, Elsevier, vol. 139(1), pages 25-46, March.
  15. Itay Goldstein & Emre Ozdenoren & Kathy Yuan, 2011. "Learning and Complementarities in Speculative Attacks," Review of Economic Studies, Oxford University Press, vol. 78(1), pages 263-292.
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  17. Burdzy, Krzysztof & Frankel, David M & Pauzner, Ady, 2001. "Fast Equilibrium Selection by Rational Players Living in a Changing World," Econometrica, Econometric Society, vol. 69(1), pages 163-89, January.
  18. 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.
  19. Jakub Steiner, 2006. "Coordination in a Mobile World," CERGE-EI Working Papers wp295, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
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