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Diffusing Coordination Risk

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Listed:
  • Deepal Basak
  • Zhen Zhou

Abstract

In a regime change game, privately informed agents sequentially decide whether to attack without observing others' previous actions. To dissuade them from attacking, a principal adopts a dynamic information disclosure policy, frequent viability tests. A viability test publicly discloses whether the regime has survived the previous attacks. When such tests are sufficiently frequent, in the unique cutoff equilibrium, agents never attack if the regime passes the latest test, regardless of their private signals. We apply this theory to demonstrate that a borrower can eliminate panic-based runs by sufficiently diffusing the rollover choices across different maturity dates.

Suggested Citation

  • Deepal Basak & Zhen Zhou, 2020. "Diffusing Coordination Risk," American Economic Review, American Economic Association, vol. 110(1), pages 271-297, January.
    • Handle: RePEc:aea:aecrev:v:110:y:2020:i:1:p:271-97
    DOI: 10.1257/aer.20171034
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    References listed on IDEAS

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    1. Dewatripont,Mathias & Hansen,Lars Peter & Turnovsky,Stephen J. (ed.), 2003. "Advances in Economics and Econometrics," Cambridge Books, Cambridge University Press, number 9780521524131, September.
    2. Acharya, Avidit & Ramsay, Kristopher W., 2013. "The Calculus of the Security Dilemma," Quarterly Journal of Political Science, now publishers, vol. 8(2), pages 183-203, April.
    3. Dewatripont,Mathias & Hansen,Lars Peter & Turnovsky,Stephen J. (ed.), 2003. "Advances in Economics and Econometrics," Cambridge Books, Cambridge University Press, number 9780521818735, September.
    4. Dewatripont,Mathias & Hansen,Lars Peter & Turnovsky,Stephen J. (ed.), 2003. "Advances in Economics and Econometrics," Cambridge Books, Cambridge University Press, number 9780521524124, September.
    5. Dewatripont,Mathias & Hansen,Lars Peter & Turnovsky,Stephen J. (ed.), 2003. "Advances in Economics and Econometrics," Cambridge Books, Cambridge University Press, number 9780521818728, September.
    6. Dewatripont,Mathias & Hansen,Lars Peter & Turnovsky,Stephen J. (ed.), 2003. "Advances in Economics and Econometrics," Cambridge Books, Cambridge University Press, number 9780521818742, September.
    7. Dewatripont,Mathias & Hansen,Lars Peter & Turnovsky,Stephen J. (ed.), 2003. "Advances in Economics and Econometrics," Cambridge Books, Cambridge University Press, number 9780521524117, September.
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    Cited by:

    1. Roweno J. R. K. Heijmans, 2023. "Unraveling Coordination Problems," Papers 2307.08557, arXiv.org, revised Aug 2023.
    2. Li, Fei & Song, Yangbo & Zhao, Mofei, 2023. "Global manipulation by local obfuscation," Journal of Economic Theory, Elsevier, vol. 207(C).
    3. John Higgins & Tarun Sabarwal, 2023. "Control and spread of contagion in networks with global effects," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 25(6), pages 1149-1187, December.
    4. Gu, Jiadong, 2023. "Optimal stress tests and liquidation cost," Journal of Economic Dynamics and Control, Elsevier, vol. 146(C).
    5. John Higgins & Tarun Sabarwal, 2021. "Control and Spread of Contagion in Networks," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 202111, University of Kansas, Department of Economics.
    6. Inostroza, Nicolas A. & Pavan, Alessandro, 0. "Adversarial coordination and public information design," Theoretical Economics, Econometric Society.
    7. Heijmans, Roweno J.R.K., 2023. "Unraveling Coordination Problems," Discussion Papers 2023/20, Norwegian School of Economics, Department of Business and Management Science.
    8. Chanelle Duley & Prasanna Gai, 2023. "Macroeconomic tail risk, currency crises and the inter‐war gold standard," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 56(4), pages 1551-1582, November.

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    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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