Crises: Equilibrium Shifts and Large Shocks
40 Pages Posted: 6 Mar 2019
There are 2 versions of this paper
Crises: Equilibrium Shifts and Large Shocks
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: Suggested Citation