Public Goods in Crises

Abstract

We introduce nonrival public goods into global games of regime change and rationalize investor behavior in the Euro crisis, the collapse of Terra, and the 2023 bank runs. Each investor in a large project is vanishingly unlikely to be pivotal for its survival. She also benefits from the project’s enormous public goods. In equilibrium, this large benefit precisely counterbalances her vanishing pivotal likelihood, such that even an atomistic and selfish investor internalizes her marginal impact on project survival. In an economy of firms, any divestment yields financial gains whenever it positively assorts projects’ public goods with investors’ sensitivities to those goods. Yet such divestments can harm the social surplus.

Keywords: Global game, nonrival public goods, Euro crisis, Terra, 2023 bank runs, voting

JEL Classification: G21, G28, D62, M14