Diffusing Coordination Risk

34 Pages Posted: 11 Jul 2017 Last revised: 28 Apr 2020

See all articles by Deepal Basak

Deepal Basak

Indian School of Business

Zhen Zhou

Tsinghua University - PBC School of Finance

Date Written: October 16, 2018

Abstract

In a regime change game, agents sequentially decide whether to attack or not, without observing the past actions by others. To dissuade them from attacking, a principal adopts a dynamic information disclosure policy - repeated viability tests. A viability test publicly discloses whether the regime has survived the attacks so far. When such tests are sufficiently frequent, in the unique cutoff equilibrium, regardless of their private signals, agents never attack if the regime passes the latest test. We apply our theory to show that by sufficiently diffusing the rollover choices across different maturity dates, a borrower can eliminate panic-based runs.

Keywords: Coordination, Global Game, Information Design, Panic-based Runs, Persuasion

JEL Classification: C72, D82, D83, G28, G33

Suggested Citation

Basak, Deepal and Zhou, Zhen, Diffusing Coordination Risk (October 16, 2018). PBCSF-NIFR Research Paper No. 2999636, Indian School of Business, Available at SSRN: https://ssrn.com/abstract=2999636 or http://dx.doi.org/10.2139/ssrn.2999636

Deepal Basak (Contact Author)

Indian School of Business ( email )

Hyderabad, Gachibowli 500 019
India

HOME PAGE: http://https://sites.google.com/a/nyu.edu/dbasak/home

Zhen Zhou

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

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