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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
Handle: RePEc:red:sed012:123
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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  18. 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.
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