Who matters in dynamic coordination problems?

Bernardo Guimaraes and Gabriel Jardanovski

Journal of Public Economic Theory, 2022, vol. 24, issue 3, 452-469

Abstract: This paper studies a dynamic coordination model with timing frictions and heterogeneity in several dimensions. Each agent might affect and be affected by others in different ways, and the frequency of their decisions might differ. We show there is a unique equilibrium in the model. The economy might sometimes be stuck in an inefficient low‐output equilibrium, and subsidies can improve welfare. We solve the planner's problem assuming no financial constraint and full commitment. The optimal subsidy does not depend on each type's timing frictions: at each point in time, the planner should simply compensate each agent for its externality on others at that particular moment—and disregard the potential for generating externalities in the future. This seemingly myopic policy provides the right incentives for forward‐looking agents. One key intuition is that players form expectations about what others will do exactly as the planner forms expectations about the actions of its future selves.

Date: 2022
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https://doi.org/10.1111/jpet.12569

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