Diffusing Coordination Risk

Deepal Basak and Zhen Zhou

American Economic Review, 2020, vol. 110, issue 1, 271-97

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.

JEL-codes: C72 D82 G21 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (14)

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DOI: 10.1257/aer.20171034

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