Falling Dominoes: A Theory of Rare Events and Crisis Contagion
- (pp. 228-55)
(Complimentary)
Abstract
Crises, such as revolutions and currency attacks, rarely occur; but when they do they typically arrive in waves. The rarity of crises is an important contagion mechanism in a multiple-country dynamic global game model. When players are uncertain about the true model of the world, observing a rare success elsewhere can substantially change their expectations concerning the payoffs from attacking or defending the regime. Such dramatic revisions in beliefs, amplified by strategic complementarity in actions, may lead to a series of attacks in other countries. The crisis period can be long-lasting, but will eventually come to an end. (JEL D74, D83, F33, G01)Citation
Chen, Heng, and Wing Suen. 2016. "Falling Dominoes: A Theory of Rare Events and Crisis Contagion." American Economic Journal: Microeconomics, 8 (1): 228-55. DOI: 10.1257/mic.20140147Additional Materials
JEL Classification
- D74 Conflict; Conflict Resolution; Alliances; Revolutions
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- F33 International Monetary Arrangements and Institutions
- G01 Financial Crises
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