Crises: Equilibrium Shifts and Large Shocks
- (pp. 2823-54)
AbstractWe study the informational events that trigger equilibrium shifts in coordination games with incomplete information. Assuming that the distribution of the changes in fundamentals has fat tails, we show that majority play shifts either if fundamentals reach a critical threshold or if there are large common shocks, even before the threshold is reached. The fat-tail assumption matters because it implies that large shocks make players more unsure about whether their payoffs are higher than others. This feature is crucial for large shocks to matter.
CitationMorris, Stephen, and Muhamet Yildiz. 2019. "Crises: Equilibrium Shifts and Large Shocks." American Economic Review, 109 (8): 2823-54. DOI: 10.1257/aer.20170159
- C72 Noncooperative Games
- C73 Stochastic and Dynamic Games; Evolutionary Games; Repeated Games
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness