Crises: Equilibrium Shifts and Large Shocks

Stephen Morris; Muhamet Yildiz

doi:10.1257/aer.20170159

American Economic Review Vol. 109 No. 8 2019

Crises: Equilibrium Shifts and Large Shocks

Stephen Morris¹; Muhamet Yildiz²

¹ Department of Economics, Princeton University, Princeton, NJ 08544 (email: ) · ² Department of Economics, Massachusetts Institute of Technology, The Morris and Sophie Chang Building, 50 Memorial Drive, Cambridge, MA 02142 (email: )

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.

DOI: 10.1257/aer.20170159
Volume: 109
Issue: 8
Pages: 2823-2854
Language: en
Sources: bibtex:phds-export.bib openalex crossref

Crises: Equilibrium Shifts and Large Shocks

Abstract

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