Local Discouragement and Global Collapse: A Theory of Coordination Avalanches
Curtis Taylor and
Thomas Jeitschko ()
American Economic Review, 2001, vol. 91, issue 1, 208-224
We study a dynamic game in which all players initially possess the same information and coordinate on a high level of activity. Eventually, players with a long string of bad experiences become inactive. This prospect can cause a coordination avalanche in which all activity in the population stops. Coordination avalanches are part of Pareto-efficient equilibria; they can occur at any point in the game; their occurrence does not depend on the true state of nature; and allowing players to exchange information may merely hasten their onset. We present applications to search markets, organizational meltdown, and inefficient computer upgrades.
JEL-codes: D83 D23 D63 (search for similar items in EconPapers)
Note: DOI: 10.1257/aer.91.1.208
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