Title

Crises: Equilibrium Shifts and Large Shocks

Author(s)

Stephen Morris Stephen Morris (Princeton University)

Muhamet Yildiz Muhamet Yildiz (Massachusetts Institute of T echnology)

Abstract

A coordination game with incomplete information is played through time. In each period, payoffs depend on a fundamental state and an additional idiosyncratic shock. Fundamentals evolve according to a random walk where the changes in fundamentals (namely common shocks) have a fat tailed distribution. We show that majority play shifts either if fundamentals reach a critical threshold or if there are large common shocks, even before the threshold is reached. The fat tails assumption matters because it implies that large shocks make players more unsure about whether their payoffs are higher than others. This feature is necessary for large shocks to matter

Creation Date

2016-11

Section URL ID

Paper Number

083_2016

URL

http://detc.princeton.edu/wp-content/uploads/2017/01/wp083_2016_Morris-Yildiz_Crises-Equilibrium-Shifts-and-Large-Shocks.pdf

File Function

Jel

E32, G01

Keyword(s)

Suppress

false

Series

10