Recurrent Crises in Global Games

David Frankel

Staff General Research Papers Archive from Iowa State University, Department of Economics

Abstract: Global games have unique equilibria in which aggregate behavior changes sharply when an underlying random fundamental crosses some threshold. This property relies on the existence of dominance regions: all players have a highest and lowest action that, for some fundamentals, is strictly dominant. But if the fundamental follows a random walk, it eventually spends nearly all of its time in these regions: crises gradually disappear. We obtain recurring crises by adding a single large player who lacks dominance regions. We also show that in order to obtain recurring crises, one must either relax dominance regions or restrict to fundamentals that continually return to or cross over a fixed region.

Keywords: Global games; recurrent crises; shocks; monopoly; network externalities (search for similar items in EconPapers)
Date: 2013-03-29
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Published in Journal of Mathematical Economics, October 2012, vol. 48 no. 5, pp. 309-321

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Journal Article: Recurrent crises in global games (2012)
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