Diffusing Coordination Risk

Basak, D and Zhou, Z (2020) Diffusing Coordination Risk. American Economic Review, 110 (1). pp. 271-97. ISSN 0002-8282

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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.

Item Type: Article
Subjects: Economics
Date Deposited: 02 Mar 2020 16:13
Last Modified: 12 Jul 2023 19:32
URI: https://eprints.exchange.isb.edu/id/eprint/1352

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