Sand in the Wheels: A Dynamic Global-Game Approach

Jakub Steiner and Laurent Mathevet

No 123, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: We study the impact of frictions on the prevalence of systemic crises. Agents privately learn about a fixed payoff parameter, and repeatedly adjust their investments while facing transaction costs in a dynamic global game. The model has a rich structure of externalities: payoffs may depend on the volume of aggregate investment, on the concentration of investment, or on its volatility. We examine how small frictions, including those similar to the Tobin tax, affect the equilibrium. We identify conditions under which frictions discourage harmful behavior without compromising investment volume. The analysis is driven by a robust invariance result: the volume of aggregate investment (measured in a pivotal contingency) is invariant to a large family of frictions.

Date: 2012
New Economics Papers: this item is included in nep-gth and nep-mic
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Working Paper: Sand in the Wheels: A Dynamic Global-Game Approach (2012)
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