The effect of options on coordination

Bernardo Guimaraes and Luis Araujo ()

No 9294, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper studies how constraints on the timing of actions affect equilibrium in intertemporal coordination problems. We show that while the possibility of waiting longer for others'? actions helps agents to coordinate in the good equilibrium, the option of delaying one?s' actions harms coordination and can induce severe coordination failures: if agents are very patient, they might get arbitrarily low expected payoffs even in cases where coordination would yield arbitrarily large returns. The risk-dominant equilibrium of the corresponding one-shot game is selected when the option to delay effort is commensurate with the option to wait longer for others?' actions. In an application to innovation processes, we show that protection of the domestic industry might hinder industrialization. We also argue that increased competition might have spurred the emergence of shadow banking in the last few decades.

Keywords: Coordination failures; Delay; Option; Strategic complementarities (search for similar items in EconPapers)
JEL-codes: C72 C73 D84 (search for similar items in EconPapers)
Date: 2013-01
New Economics Papers: this item is included in nep-cdm, nep-gth and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP9294 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: The effect of options on coordination (2013)
Working Paper: The effect of options on coordination (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:9294

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP9294

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().