Dynamic Interventions and Informational Linkages

95 Pages Posted: 7 Mar 2016 Last revised: 28 May 2019

See all articles by Lin William Cong

Lin William Cong

Cornell University; University of Chicago - Booth School of Business

Steven R. Grenadier

Stanford Graduate School of Business

Yunzhi Hu

University of North Carolina (UNC) at Chapel Hill - Finance Area

Date Written: Feb 2019

Abstract

We model a dynamic economy with strategic complementarity among investors and
study how endogenous government interventions mitigate coordination failures. We establish
equilibrium existence and uniqueness, and we show that one intervention can affect
another through altering the public information structure. A stronger initial intervention
helps subsequent interventions through increasing the likelihood of positive
news, but also leads to negative conditional updates. Our results suggest optimal
policy should emphasize initial interventions when coordination outcomes tend to correlate.
Neglecting informational externalities of initial interventions results in over- or
under-interventions. Moreover, saving smaller funds disproportionally more can generate greater informational benefits at smaller costs.

Keywords: Coordination Failures, Government Intervention, Information Design, Financial Crisis, Global Games

JEL Classification: D81, D83, G01, G28, O33

Suggested Citation

Cong, Lin and Grenadier, Steven R. and Hu, Yunzhi, Dynamic Interventions and Informational Linkages (Feb 2019). Chicago Booth Research Paper No. 17-09. Available at SSRN: https://ssrn.com/abstract=2742818 or http://dx.doi.org/10.2139/ssrn.2742818

Lin Cong (Contact Author)

Cornell University ( email )

Ithaca, NY 14853
United States

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Steven R. Grenadier

Stanford Graduate School of Business ( email )

Graduate School of Business
Stanford, CA 94305-5015
United States
650-725-0706 (Phone)
650-725-6152 (Fax)

Yunzhi Hu

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

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