American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Crises: Equilibrium Shifts and Large Shocks
American Economic Review
vol. 109,
no. 8, August 2019
(pp. 2823–54)
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.Citation
Morris, Stephen, and Muhamet Yildiz. 2019. "Crises: Equilibrium Shifts and Large Shocks." American Economic Review, 109 (8): 2823–54. DOI: 10.1257/aer.20170159Additional Materials
JEL Classification
- C72 Noncooperative Games
- C73 Stochastic and Dynamic Games; Evolutionary Games; Repeated Games
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness