Dynamic Interventions and Informational Linkages

71 Pages Posted: 7 Mar 2016 Last revised: 26 Nov 2017

See all articles by Lin William Cong

Lin William Cong

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: November 23, 2017

Abstract

We model a dynamic economy with strategic complementarity among investors and endogenous government interventions that mitigate coordination failures. We establish equilibrium existence and uniqueness, and 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, depending on intervention costs. Moreover, saving smaller funds disproportionally more can generates greater informational benefits at smaller costs. Our paper is thus informative of the interaction of multiple intervention programs such as those enacted during the 2008 financial crisis.

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 (November 23, 2017). 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)

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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