Diffusing Coordination Risk
American Economic Review
vol. 110,
no. 1, January 2020
(pp. 271-97)
Abstract
In a regime change game, privately informed agents sequentially decide whether to attack without observing others' previous actions. To dissuade them from attacking, a principal adopts a dynamic information disclosure policy, frequent viability tests. A viability test publicly discloses whether the regime has survived the previous attacks. When such tests are sufficiently frequent, in the unique cutoff equilibrium, agents never attack if the regime passes the latest test, regardless of their private signals. We apply this theory to demonstrate that a borrower can eliminate panic-based runs by sufficiently diffusing the rollover choices across different maturity dates.Citation
Basak, Deepal, and Zhen Zhou. 2020. "Diffusing Coordination Risk." American Economic Review, 110 (1): 271-97. DOI: 10.1257/aer.20171034Additional Materials
JEL Classification
- C72 Noncooperative Games
- D82 Asymmetric and Private Information; Mechanism Design
- G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages