Crises: Equilibrium Shifts and Large Shocks

40 Pages Posted: 6 Mar 2019

See all articles by Stephen Morris

Stephen Morris

MIT

Muhamet Yildiz

Massachusetts Institute of Technology (MIT) - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: January 2019

Abstract

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.

JEL Classification: C72, D84

Suggested Citation

Morris, Stephen Edward and Yildiz, Muhamet, Crises: Equilibrium Shifts and Large Shocks (January 2019). Available at SSRN: https://ssrn.com/abstract=3334553 or http://dx.doi.org/10.2139/ssrn.3334553

Stephen Edward Morris

MIT ( email )

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Muhamet Yildiz (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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