Crises: Equilibrium Shifts and Large Shocks
- American Economic Review (Forthcoming)
We 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.
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