Competing to Coordinate: Crowding Out in Coordination Games [Job Market Paper]

Abstract:

Standard coordination games feature individual payoffs that are independent of the aggregate coalition size. This paper develops a framework for coordination games which can account for the role of competition. We characterize equilibrium outcomes under different information structures, allowing us to find a unique equilibrium strategy of global games without being restricted to settings of supermodularity. The model highlights the impact of crowding out in coordination games, wherein substitutability lowers individual payoffs from coordinating. In many common global game contexts, accounting for the crowding out of payoffs changes widely held intuitions on strategies, and on policy implications. For example, in the context of speculative currency attacks, selling a currency after receiving bad signals about reserves may no longer be a dominant strategy; in the presence of substitutability, setting a quota on how many speculators can attack may increase the chance of regime floating; currencies with potentially small depreciations but ample liquidity can be subjected to more pressure than currencies with potentially huge depreciation but low liquidity.

Last updated on 12/02/2018