Dynamic Global Games of Regime Change: Learning, Multiplicity, and the Timing of Attacks

Abstract

Global games of regime change-coordination games of incomplete information in which a status quo is abandoned once a sufficiently large fraction of agents attack ithave been used to study crises phenomena such as currency attacks, bank runs, debt crises, and political change. We extend the static benchmark examined in the literature by allowing agents to take actions in many periods and to learn about the underlying fundamentals over time. We first provide a simple recursive algorithm for the characterization of monotone equilibria. We then show how the interaction of the knowledge that the regime survived past attacks with the arrival of information over time, or with changes in fundamentals, leads to interesting equilibrium properties. First, multiplicity may obtain under the same conditions on exogenous information that guarantee uniqueness in the static benchmark. Second, fundamentals may predict the eventual fate of the regime but not the timing or the number of attacks. Finally, equilibrium dynamics can alternate between phases of tranquility-where no attack is possible-and phases of distress-where a large attack can occur-even without changes in fundamentals.

Dynamic coordination with individual learning

“…The current analysis bears a general connection to models of information dynamics in multi-stage global games (e.g., Chamley [3], Angeletos, Hellwig and Pavan [1]). In contrast to our work, papers in this strand of the literature focus on learning from endogenously generated public signals, and focus on the robustness of equilibrium uniqueness in global games.…”

“…The canonical global game requires that all agents choose their actions simultaneously. To what extent would the incidence of coordination failure change if we allowed for some asynchronicity in the actions of potential participants 1 More precisely, equilibria of the underlying complete information game survive in the induced global game only if they are p-dominant (Morris, Rob, and Shin [16]) for "low" p. Exactly how low p must be depends on the structure of the game. In two player games, p-dominant equilibria for p < 1 2 survive.…”

“…Roughly speaking, agents are only able to coordinate on some risky action in the unique equilibrium of a global game if that action is risk dominant, i.e., it is optimal for each agent to choose that action in the underlying complete information game even when there is only a "low" probability that his fellow players will choose that action. 1 This can only happen if the benefits that arise from the action conditional upon success are high relative to the cost of undertaking it. Thus, the global games literature has negative implications for the ability of agents to coordinate on socially beneficial actions: only projects that involve "little strategic risk" will be implemented in equilibrium.…”

Coordination and social learning

“…1 However, such a well-known result is not obvious when players need to coordinate. In particular, when there are incentives to coordinate, players make inferences from their private signals not only about the unknown fundamentals, but also about their opponents' signals (and hence their opponents' actions).…”

Experiments on Macroeconomics: Methods and Applications

“…24 It can also explain twin crises. 25 Angeletos, Hellwig, and Pavan (2007) use global games to explain alternating phases of tranquility and phases of distress on financial markets.…”