speculative attacks unique equilibrium and transparency abstract models with multiple equilibria are a popular way to explain currency attacks morris and shin 1998 have shown that in the context of those models unique equilibria may prevail once noisy private information is introduced in this paper we apply the method of morris and shin to a broader class of probability distributions and show using the technique of iterated elimination of dominated strategies that their results continue to hold even if we allow for sunspots and individual uncertainty about strategic behavior of other agents we provide a clear exposition of the logic of this model and we analyze the impact of transparency on the probability of a speculative attack for the case of uniform distribution of noisy signals we show that increased transparency of government policy reduces the likelihood of attacks

information quality and crises in regime change games abstract when crises potentially originate from coordination failures does a deterioration in the quality of the information available to market participants contribute towards instability we address this question in a general global game of regime change with a unique equilibrium and illustrate the implications in a debt rollover application we show that a reduction in the quality of information increases the likelihood of regime change thus reducing stability when the net payoff in the case of a successful attack is more sensitive to the fundamentals than the net payoff in the case of status quo survival we also discuss welfare implications

defending against speculative attacks the policy maker s reputation abstract this paper studies how speculative attacks and regime change arise from the interaction between a policy maker s reputation for defending against speculative attacks and speculators learning of the policy maker s type if speculators receive conditionally independent and identically distributed private signals about the policy maker s type in every period then no matter how precise their per period private signals are there can be no equilibrium with attacks if the speculators receive private signals whose precision increases as a power function of the time with the power strictly greater than two there exist infinitely many equilibria with attacks but this equilibrium multiplicity arises from the timing of the attacks only in such a case the set of status quos surviving in any equilibrium is strictly larger than in the case of a short lived policy maker

self fulfilling currency crises the role of interest rates abstract we develop a stylized currency crises model with heterogeneous information among investors andendogenous determination of interest rates in a noisy rational expectations equilibrium our modelcaptures three key features of interest rates the opportunity cost of attacking the currency respondsto the investors behavior the domestic interest rate may influence the central bank s preferences fora fixed exchange rate and the domestic interest rate serves as a public signal which aggregatesprivate information about fundamentals we explore the payoff and informational channels throughwhich interest rates determine devaluation outcomes and examine the implications for equilibriumselection by global games methods our main conclusion is that multiplicity is not an artifact ofcommon knowledge in particular we show that multiplicity emerges robustly either when adevaluation is triggered by the cost of high domestic interest rates as in obstfeld 1996 or when adevaluation is triggered by the central bank s loss of foreign reserves as in obstfeld 1986 providedthat the domestic asset supply is sufficiently elastic in the interest rate and shocks to the domesticbond supply are sufficiently small christian helliwigdepartment of economicsuniversity of california los angelesbox 951477los angeles ca 90095 1477arijit mukherjiuniversity of minnesotaaleh tsyvinskidepartment of economicsharvard universitylittauer centercambridge ma 02138 3001

the demise of the national union in italy lessons for comparative industrial relations theory using data collected during field research in italy on the reorganization of the auto industry the author analyzes recent changes in italian industrial relations based on this case study he argues for a new approach to comparative industrial relations research and theory instead of treating national systems as the basic unit of analysis and searching for macro institutional features as the key dimensions to use in constructing comparative typologies of industrial relations systems the author develops an approach focusing on micro level developments and the politics of strategic choice to explain variation within nations two factors appear to be crucial in explaining this variation local socioeconomic conditions that shape the strategies of unions and management in firms undergoing adjustment and the choices unions make in reallocating responsibilities between local and national structures

monetary policy macro stability and growth there is greater appreciation now amongst economists of the negative effect of uncertainty on investment growth and equality especially when credit constraints are widespread this implies an important linkage between the transparency and predictability of the policy environment and growth and equality the paper begins with a literature survey on the inflation and inflation volatility link the uncertainty and investment link and the inflation volatility and growth link this framework is used to examine the experience of south africa s new monetary policy regime inflation targeting it in achieving greater macrostability south africa is an interesting case study being one of the more advanced of the emerging markets with its deep and sophisticated financial system and yet with around 35 percent unemployment and a legacy of developmental problems from the apartheid era the authors demonstrate using evidence from three sources of micro data that the new monetary regime is more credible transparent and predictable they examine the performance of monetary policy and argue it has not resulted in real interest rate levels that are a hindrance to growth they explore the better response under it to big external shocks like exchange rate depreciation as compared with the monetary regime prior to it the paradox is examined of success in achieving macro stability where greater household acquisition of debt and increased demand is both inflationary and limits saving hence constraining corporate investment the paper concludes with lessons from south africa s recent successful monetary policy experience for other emerging market countries and for less developed countries central banks e g in africa

a comparative analysis of current credit risk models the new bis 1998 capital requirements for market risks allows banks to use internal models to assess regulatory capital related to both general market risk and credit risk for their trading book this paper reviews the current proposed industry sponsored credit value at risk methodologies first the credit migration approach as proposed by jp morgan with creditmetrics is based on the probability of moving from one credit quality to another including default within a given time horizon second the option pricing or structural approach as initiated by kmv and which is based on the asset value model originally proposed by merton merton r 1974 journal of finance 28 449 470 in this model the default process is endogenous and relates to the capital structure of the firm default occurs when the value of the firm s assets falls below some critical level third the actuarial approach as proposed by credit suisse financial products csfp with creditrisk and which only focuses on default default for individual bonds or loans is assumed to follow an exogenous poisson process finally mckinsey proposes creditportfolioview which is a discrete time multi period model where default probabilities are conditional on the macro variables like unemployment the level of interest rates the growth rate in the economy which to a large extent drive the credit cycle in the economy 2000 elsevier science b v all rights reserved

information acquisition coordination and fundamentals in a financial crisis abstract this paper reconciles the two explanations of a financial crisis the self fulfilling prophecy and the fundamental causes in an empirically relevant framework by explicitly modeling the costly voluntary acquisition of information about fundamentals in a variant of diamond and dybvig diamond d dybvig p 1983 bank runs deposit insurance and liquidity journal of political economy 91 401 419 the model exhibits strategic complementarity in information acquisition in the partial run equilibrium investors engage in costly evaluation of projects so that banks with lower return projects fail there also exist the classic full run and no run equilibria in which there is no project evaluation investors coordination on a specific equilibrium is triggered by a self fulfilling prophecy so financial crises are seen as both fundamentals based and self fulfilling prophecies based phenomena

bubbles crashes and endogenous uncertainty in linked asset and product markets in laboratory asset markets subjects trade shares of a firm whose profits in a linked product market determine dividends treatments vary whether dividend information is revealed once per period or in real time and whether the firm is controlled by a profit maximizing robot or human subject the latter variation induces uncertainty about firm behavior bridging the gap between laboratory and field markets our data replicate well known features of laboratory asset markets e g bubbles suggesting these are robust to a market based dividend process compared to a sample of previous experiments both real time information revelation and endogenous uncertainty impede the bubble mitigating impact of experience

measuring banks liquidity risk an option pricing approach abstract this paper proposes a new approach to evaluating banks liquidity needs which is not only well grounded theoretically but is also easy to apply practically within the framework of a global game with imperfect information we first establish a boundary condition for bank runs and show that there exists a unique nash equilibrium for bank runs using the option pricing approach we then obtain a closed form formula for the value of bank equity with both run risk and insolvency risk finally a bank s optimal liquidity ratio is derived by maximizing the value of bank equity using data on chinese listed banks we show that the deviation of the actual liquidity ratio from the optimal liquidity ratio in a bank represents a robust proxy for its liquidity risk an increased liquidity shortfall leads to worsening liquidity problems and this is particularly pronounced when the liquidity shortfall is high

contagion of self fulfilling financial crises due to diversification of investment portfolios abstract we look at two countries that have independent fundamentals but share the same group of investors each country might face a self fulfilling crisis agents withdrawing their investments fearing that others will a crisis in one country reduces agents wealth this makes them more averse to the strategic risk associated with the unknown behavior of other agents in the second country increasing their incentive to withdraw their investments consequently the probability of a crisis there increases this generates a positive correlation between the returns in the two countries since diversification affects returns in our model its welfare implications are non trivial

modeling the experimentally organized economy complex dynamics in an empirical micro macro model of endogenous economic growth abstract the swedish micro to macro model moses is used to show how complex economic behavior emerges from interacting boundedly rational agents the simulation model has been calibrated using business firm data non linearities arise in its specification of technology the distribution of firm characteristics and in the rules that govern entry and exit the model economy is characterized by a restless competitive growth process that is normally robust but that now and then generates phases of local disorderly behavior including for some parameter settings the collapse of entire sectors the model explains why government agents have difficulty predicting the reactions of the economy to policies suggesting that government treads cautiously in order not to do more harm than good

information acquisition in global games of regime change abstract we study costly information acquisition in global games of regime change that is coordination games where payoffs are discontinuous in the unobserved state and in the agents average action we show that only symmetric equilibria exist and provide sufficient conditions for uniqueness we then characterize the value of information in these games and link it to the underlying parameters of the model we investigate equilibrium efficiency complementarities in information choices and the trade offs between public and private information we show that information acquisition can be inefficient and that strategic complementarities in actions do not always translate into strategic complementarities in information acquisition finally we find that public and private information can be complements these results contrast findings in linear quadratic models where payoffs depend continuously on both the unobserved state and the agents average action

sovereign debt sustainability in advanced economies we develop a measure of maximum sustainable government debt for advanced economies how much investors are willing to lend to a country s government depends on the country s expected primary surplus the level and volatility of its rate of growth and how much debt the government expects to be able to raise in the future for the purpose of servicing the debt it seeks to raise today we provide a simple formula that computes a country s maximum sustainable debt msd as a function of four easy to estimate parameters we further compute a country s theoretical probability of default pd as a function of its debt to gdp ratio we nally calibrate our measures for 23 oecd countries and test the relation between sovereign yield spreads and our theoretical pd at prevailing debt levels we nd it to be strongly statistically signicant jel h63

coordination and delay in global games abstract what is the effect of offering agents an option to delay their choices in a global coordination game we address this question by considering a canonical binary action global game and allowing players to delay their irreversible decisions those that delay have access to accurate private information at the second stage but receive lower payoffs we show that as noise vanishes as long as the benefit to taking the risky action early is greater than the benefit of taking the risky action late the introduction of the option to delay reduces the incidence of coordination failure in equilibrium relative to the standard case where all agents must choose their actions at the same time we outline the welfare implications of this finding and probe the robustness of our results from a variety of angles

dynamic global games of regime change learning multiplicity and the timing of attacks 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 it have 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

unique equilibrium in a model of self fulfilling currency attacks even though self fulfilling currency attacks lead to multiple equilibria when fundamentals are common knowledge we demonstrate the uniqueness of equilibrium when speculators face a small amount of noise in their signals about the fundamentals this unique equilibrium depends not only on the fundamentals but also on financial variables such as the quantity of hot money in circulation and the costs of speculative trading in contrast to multiple equilibrium models our model allows analysis of policy proposals directed at curtailing currency attacks

the local political economy of industrial adjustment variations in trade union responses to industrial restructuring in the italian textile clothing sector this article observes that local trade union responses to industrial restructuring in the 1970s and 1980s varied widely in italy and that these variations reflect local economic political and organizational factors unions may oppose accept or seek to modify managerial restructuring they may pursue their goals at the factory level or at the territorial level and they may be generally successful or unsuccessful in accomplishing their objectives the article argues that economic differences between italy s industrial triangle of traditional fordist mass production and the third italy of flexible specialization explain the generally greater activism of the unions in the former where restructuring was a far more disruptive traumatic phenomenon than it was in the latter but the article also observes striking differences within the industrial triangle and within the third italy that cannot be explained in economic terms rather these differences are shown to result from variations in the local

market microstructure information aggregation and equilibrium uniqueness in a global game abstract speculators contemplating an attack e g on a currency peg must guess the beliefs of other speculators which they can do by looking at the stock market as shown in earlier work this information gathering process may be destabilising by creating multiple equilibria this paper studies the role played by the microstructure of the asset market in the emergence of multiple equilibria driven by information aggregation to do so we study the outcome of a two stage global game wherein an asset price determined at the trading stage of the game provides an endogenous public signal about the fundamental that affects traders decision to attack in the coordination stage of the game in the trading stage placing a full demand schedule i e a continuum of limit orders is costly but traders may use riskier and cheaper market orders i e order to sell or buy a fixed quantity of assets unconditional on the execution price price execution risk reduces traders aggressiveness and hence slows down information aggregation which ultimately makes multiple equilibria in the coordination stage less likely in this sense microstructure frictions that lead to greater individual exposure to price execution risk may reduce aggregate uncertainty by pinning down a unique equilibrium outcome

liquidity and contagion the crisis of 1763 the financial crisis that swept across northern europe in 1763 bears a strong resemblance to more recent episodes of financial distress the combination of the specific contractual arrangements at the time interlocking credit relationships and the high leverage of market participants triggered distress sales of assets leading into a severe liquidity crisis hence the crisis is an early instance of contagion on the asset side of the balance sheet we highlight the salient features of the 1763 crisis and propose a stylized model of the events whilst the financial institutions have changed fundamentally in the intervening two hundred or so years the underlying problems appear to be universal

big elephants in small ponds do large traders make financial markets more aggressive abstract market participants often suspect that large traders have a disproportionate effect on financial markets increasing the aggressiveness of market responses prior studies have shown that the impact of a large trader on a currency crisis depends positively on his size and informational position by contrast this article highlights the role that market sentiment has on the impact of a large trader if the market believes that fundamentals are weak then the probability of a crisis depends positively on the trader s size but negatively on the precision of his information with these effects reversed in a generally optimistic market a large player therefore need not make market responses more aggressive

who matters in coordination problems we consider a common investment project that is vulnerable to a self fullling coordination failure and hence is strategically risky based on their private information agents who have heterogeneous investment incentives form expectations or sentiments about the project s outcome we nd that the sum of these sentiments is constant across dierent strategy proles and it is independent of the distribution of incentives as a result we can think of sentiment as a scarce resource divided up among the dierent payo types applying this nding we show that agents who benet little from the project s success have a large impact on the coordination process the agents with small benets invest only if their sentiment towards the project is large per unit investment cost as the average sentiment is constant a subsidy decreasing the investment costs of these agents will free up a large amount of sentiment provoking a large impact on the whole economy intuitively these agents insensitive to the project s outcome and hence to the actions of others are inuential because they modify their

micro heterogeneity of firms and the stability of industrial growth abstract in the micro macro m m model moses real swedish firms make independent decisions in markets schumpeterian innovative activities and wicksellian capital market disequilibria generate a growth cycle production and investment decisions in firms are dynamically coordinated by markets for products labor and capital under different market regimes as to speed intensity of competitive processes and of innovative activity by varying market regime ceteris par leux long term growth rates of the economy can be generated at cliffe as much as between the industrial countries during the last 50 years high speed market processes increase output growth for long periods but make the model economy sensitive to disturbances that eventually generate a severe depression simulation results suggest the importance for stable macroeconomic growth of a steady input of innovative technical change through new investment new entry and exit to preserve micro diversity of structures

corporatism in decline an empirical analysis of the impact of corporatism on macroeconomic performance and industrial disputes in 18 industrialized democracies during the 1970s and early 1980s most studies on corporatism indicated that corporatist policies led to lower unemployment and inflation and higher economic growth rates in the mid and late 1980s however voices claiming that corporatism is in decline became more and more frequent although hardly any empirical examinations were undertaken the purpose of this study is to estimate empirically the influence of corporatist arrangements on macroeconomic performance and industrial disputes in the 1980s as compared with the 1970s and 1960s this pooled time series cross sectional analysis provides evidence that corporatist policies have not lost their capacity to achieve the desired macroeconomic goals in the 1980s in addition corporatism significantly reduces the number of working days lost however no evidence was found that corporatism leads to increased economic growth there is evidence that economic growth is adversely affected by government outlays

coordination under limited depth of reasoning this paper provides the first unified explanation of behavior in coordinated attack games under both public and private information it demonstrates that the main experimental results such as threshold strategies comparative statics and the differences in behavior under public and private information are robust predictions of limited depth of reasoning models this is in contrast to equilibrium which mispredicts the coordinating roles of public and private information the analysis has implications for understanding macroeconomic phenomena like currency attacks and debt crises which are commonly modeled using incomplete information coordinated attack games

a primer on global games applied to macroeconomics and finance this paper shows how to solve global games applied to macroeconomics and finance we ascertain the roles of public and private information for the determination of a unique equilibrium and discuss the informative role of market prices we examine the impact of public information on social welfare comparing models with and without complementarities at the aggregate level

government partisanship labor organization and macroeconomic performance governments of the left and right have distinct partisan economic policies and objectives that they would prefer to pursue their propensity to do so however is constrained by their desire for reelection we argue that the ability of governments to further their partisan interests and preside over reelectable macroeconomic outcomes simultaneously is dependent on the organization of the domestic economy particularly the labor movement we hypothesize that there are two different paths to desirable macroeconomic performance in countries with densely and centrally organized labor movements leftist governments can promote economic growth and reduce inflation and unemployment conversely in countries with weak labor movements rightist governments can pursue their partisan preferred macroeconomic strategies and achieve similarly beneficial macroeconomic outcomes performance will be poorer in other cases these hypotheses are supported by analysis of pooled annual time series data for 16 advanced industrial democracies between 1967 and 1984

a global game with strategic substitutes and complements abstract we study a global game in which actions are strategic complements over some region and strategic substitutes over another region an agent s payoff depends on a market fundamental and the actions of other agents if the degree of congestion is sufficiently large agents strategies are non monotonic in their signal about the market fundamental in this case a signal that makes them believe that the market fundamental is more favorable for an action may make them less likely to take the action because of the risk of overcrowding

information choice and amplification of financial crises we propose an amplification mechanism of financial crises based on the information choices of investors information acquisition makes investors more likely to act against their prior deteriorating public news under an initially strong weak prior increases reduces the value of private information and induces more less information acquisition deteriorating public news increases the probability of a crisis since the initially strong weak prior induces no attacks attacks this effect is amplified with endogenous information choices to enhance financial stability a policy maker affects information acquisition via taxes and subsidies we derive and discuss testable implications for the magnitude of amplification

can debt crises be self fulfilling abstract several papers argue that debt crises can be the result of self fulfilling expectations that no one will lend to a country triggering default and rationalizing the refusal to lend i show these coordination failures can be eliminated by a combination of state contingent securities and a mechanism that allows investors to promise to lend only if enough other investors do so as well this suggests that runs on the debt of a single borrower such as the government can be eliminated and that self fulfilling features are more plausible when externalities among many decentralized borrowers allow for economy wide debt runs to occur

financial distress and the business cycle in this paper we argue that firms financial distress should play a greater role in the macroeconomic analysis of the business cycle we provide a non technical account of a general equilibrium model that exhibits financially driven equilibrium cycles we show that the empirical evidence is widely supportive of the key hypothesis and implications of our approach we use the model in order to evaluate the effects of several policy measures it turns out that deepening the market for second hand capital goods subsidizing the interest payments of companies which start up when financial conditions are tight and bailing out some companies in default can indeed stabilize the economy by way of generalization we may say that the policy reaction to a financially driven bust should be accommodating

the development and use of machine tools in historical perspective abstract improvements and diffusion of machine tools have had a major impact on productivity in manufacturing industry since the industrial revolution the impact has been both direct and indirect the direct impact consists of rising labor productivity through the use of faster more accurate more mechanized machines and of the higher capital productivity through higher operating rates greater reliability and higher utilization rates the indirect impact arises as the use of new or improved machine tools has necessitated or facilitated organizational changes affecting both labor capital raw materials and energy the magnitude of these impacts has varied over the years with the areas of application as new production methods have made possible entirely new products or lowered the cost of existing products sufficiently to create new markets the first part of the paper contains a review of the historical development of machine tool technology since the industrial revolution paying particular attention to the role of interaction between producers and users of machine tools the second part focuses on the way in which recent development differs from that in earlier periods in particular it is found that the major changes in machine tool technology from the so called american system of manufactures in the early 19th century to the development of detroit automation in the 1950s have tended to improve mass production methods by contrast the development of numerical control beginning in 1948 has opened up the possibility of extending industrial production methods and automation to areas previously characterized more by handicraft methods even though this technology is not yet fully utilized it is clear that the economics of industrial production has been revolutionized by the cost reduction of small scale production relative to large scale and the degree of flexibility offered by the technology the third section of the paper deals with the present development trends particularly discussing the increasing importance of flexibility and the shifting emphasis from development of individual pieces of machinery to integration and control of entire manufacturing processes i a through the use of industrial robots the reasons for the need for greater flexibility in manufacturing are also identified

public information private information and the multiplicity of equilibria in coordination games abstract i study coordination games with incomplete public and private information and relate equilibrium convergence to convergence of higher order beliefs as the players signals become more and more precise the equilibrium manifold converges to the correspondence of common knowledge equilibria whenever the variance of the public signal converges to 0 at a rate faster than one half the rate of convergence of the variance of private signals the same condition also determines the convergence of common p belief to common knowledge which leads to a simple intuition for its origin and an immediate generalization of the former results about equilibrium convergence journal of economic literature classification numbers c72 d82

uncertainty and currency crises evidence from survey data this paper studies empirically how uncertainty aects speculation in the foreign ex change markets we use the dispersion of survey forecasts of key macroeconomic variables to measure uncertainty about fundamentals we nd that uncertainty has a non monotone eect on exchange rate pressures namely uncertainty heightens speculative pressures when expected fundamentals are good and eases them when they are bad we prove that this prediction arises from a broad class of currency crisis theories ranging from rst generation to global game models we also show that the proposed empirical strategy remains valid in the presence of forecasters with strategic objectives and use a novel set of instrumental variables to address potential endogeneity bias

the rise and decline of nations economic growth stagflation and social rigidities the years since world war ii have seen rapid shifts in the relative positions of different countries and regions leading political economist mancur olson offers a new and compelling theory to explain these shifts in fortune and then tests his theory against evidence from many periods of history and many parts of the world

the ecb s omts a tale of governments investors and the central bank this paper analyses official financial assistance via esm programmes with and without the ecb s omts as long as macroeconomic imbalances are small esm stand alone programmes galvanize creditors into rolling over their loans alleviate the liquidity crisis and help the country to implement adjustment policies yet the impact of fiscal consolidation and structural reforms is likely to be recessionary in the short run since these reforms take a long time to pay off recessionary effects raise strategic uncertainty in the roll over decisions of creditors thus reducing the effectiveness of esm liquidity assistance with large imbalances liquidity problems can only be overcome with credible and sizable official assistance adding omts to an esm programme mitigates the policy dilemma but does not fully restore investor confidence when macroeconomic imbalances are too large

illiquidity component of credit risk we describe and contrast three dierent measures of an institu tion s credit risk insolvency risk is the conditional probability of default due to deterioration of asset quality if there is no run by short term creditors total credit risk is the unconditional probability of default either because of a short term creditor run or long run asset insolvency illiquidity risk is the dierence between the two i e the probability of a default due to a run when the institution would otherwise have been solvent we discuss how the three kinds of risk vary with balance sheet composition we provide a formula for illiquidity risk and show that it is i decreasing in the liquidity ratio the ratio of realizable cash on the balance sheet to short term liabilities ii increasing in the outside option ratio a measure of the opportunity cost of the funds used to roll over short term liabil ities and iii increasing in the fundamental risk ratio a measure of ex post variance of the asset portfolio

dynamic debt runs we develop a dynamic model of debt runs on a rm which invests in an illiquid asset by rolling over staggered short term debt contracts i e dierent contracts mature at dierent times we derive a unique threshold equilibrium in which creditors coordinate their asynchronous rollover decisions based on the rm s publicly observable and time varying fundamental the coordination problem ampli es the creditors concerns about the rm s future rollover risk created by its time varying fundamental and causes each maturing creditor to run ahead of others even when the current fundamental is substantially higher than its liability our model provides a set of implications on the roles played by volatility illiquidity and debt maturity in driving debt runs as well as on rms capital adequacy standards and credit risk

the electronic mail game strategic behavior under almost common knowledge the paper addresses a paradoxical game theoretic example which is closely related to the coordinated attack problem two players have to play one of two possible coordination games only one of them receives information about the coordination game to be played it is shown that the situation with almost common knowledge is very different from when the coordination game played is common knowledge

optimal debt structure and the number of creditors within an optimal contracting framework we analyze the optimal number of creditors a company borrows from we also analyze the optimal allocation of security interests among creditors and intercreditor voting rules that govern renegotiation of debt contracts the key to our analysis is the idea that these aspects of the debt structure affect the outcome of debt renegotiation following a default debt structures that lead to inefficient renegotiation are beneficial in that they deter default but they are also costly if default is beyond a manager s control the optimal debt structure balances these effects we characterize how the optimal debt structure depends on firm characteristics such as its technology its credit rating and the market for its assets

the hazards of debt rollover freezes incentives and bailouts we investigate the trade o between incentive provision an di ne ient rollover freezes for a firm financed with short term debt first debt maturity that is too short term is ine cient even with incentive provision th eo ptimal maturity is an interior solution that avoids excessive rollover risk whil ep roviding su ient incentives for the manager to avoid risk shifting when the firm is in good health second allowing the manager to risk shift during a freeze actually increase sc reditor conf idence debt policy should not prevent the manager from holding what may appear to be otherwise low mean strategies that have option value during a freeze third a limited but not perfectly reliable form of emergency financing during a freeze a bailout may improve the terms of the trade o and increase total ex ante va lue by instilling confidence in the creditor markets our conclusions highlight the endogenous interaction between risk from the asset and liability sides of the balance sheet

the content of productivity growth in swedish manufacturing abstract it is hardly surprising that the slowdown in economic growth throughout the industrial world in the last decade has attracteda lot of attention by economists the decline in productivity growth has been a special object of study however the causes of this decline still largely remain a mystery in the present paper it is suggested that a more micro based approach to the problem than the conventional macro oriented growth accounting method yields additional insights a methodology is outlined which can at least complement the conventional approach and which is specially designed to open the way for micro analysis of productivity change without losing sight of the macro side this is done by first breaking down total factor productivity growth through disaggregation to lower and lower levels of observation in order to separate out structural from purely technical changes then framework is presented for analyzing how productivity changes at the micro level can be aggregated to the macro level the results emphasize the importance of economies of scale and resource allocation

efficient ex ante stabilization of firms abstract distressed firms are vulnerable to inefficient panic based runs of their workers suppliers and customers a policymaker may try to prevent such a run by pledging to protect the interests of these stakeholders should a firm cease to do business however this promise also enables the firm to demand better terms of trade from its stakeholders which blunts the policy s effectiveness we show how to avoid such an adverse response by the use of partial countercyclical insurance under certain conditions such a scheme costlessly implements the first best outcome in the limit as the stakeholders information becomes precise we also identify least cost efficient schemes in the cases of large noise learning and duopoly

the effect of endogenous timing on coordination under asymmetric information an experimental study abstract this paper investigates the role of endogenous timing of decisions on coordination under asymmetric information in the equilibrium of a global coordination game where players choose the timing of their decision a player who has sufficiently high beliefs about the state of the economy undertakes an investment without delay this decision potentially triggers an investment by the other player whose beliefs would have led to inaction otherwise endogenous timing has two distinct effects on coordination a learning effect early decisions reveal information and a complementarity effect early decisions eliminate strategic uncertainty for late movers the experiments that we conduct to test these theoretical results show that the learning effect of timing has more impact on the subjects behavior than the complementarity effect we also observe that subjects welfare improves significantly under endogenous timing

sovereign liquidity crises analytics and implications for public policy abstract this paper offers an analytical framework with which to assess some recent proposals for strengthening the international financial architecture we develop a model of sovereign liquidity crises that reflects two sources of financial stress weak fundamentals and self fulfilling expectations we examine the nature of the underlying co ordination game and investigate the properties of the unique equilibrium in so doing we are able to characterise the welfare costs of belief driven crises which we find to be potentially significant we also evaluate some recent policy proposals including prudent debt and liquidity management capital controls greater information disclosure and the efficacy of monetary policy tightening in the midst of crisis

heterogeneity and stability bolster the strong not the weak we first study a stylized model of self fulfilling panic among agents with differing fragilities to strategic risk and show that depending on the severity of coordination problems the panic trigger threshold can depend only on one type s fragility we then present a model of systemic panic among financial institutions with heterogeneous fragilities to financial spillovers concerns about potential spillovers generate strategic interaction triggering a pre emption game in which one tries to exit the market before others to avoid spillovers although financial contagion originates in weaker institutions systemic risk can critically depend on financial health of stronger in the contagion chain in this case bolstering the strong rather than the weak more effectively enhances systemic stability

identification and estimation of dynamic games when players beliefs are not in equilibrium this article deals with the identification and estimation of dynamic games when players beliefs about other players actions are biased that is beliefs do not represent the probability distribution of the actual behaviour of other players conditional on the information available first we show that an exclusion restriction typically used to identify empirical games provides testable non parametric restrictions of the null hypothesis of equilibrium beliefs in dynamic games with either finite or infinite horizon we use this result to construct a simple likelihood ratio test of equilibrium beliefs second we prove that this exclusion restriction together with consistent estimates of beliefs at two points in the support of the variable involved in the exclusion restriction is sufficient for non parametric point identification of players belief functions as well as useful functions of payoffs third we propose a simple two step estimation method we illustrate our model and methods using both monte carlo experiments and an empirical application of a dynamic game of store location by retail chains the key conditions for the identification of beliefs and payoffs in our application are the following 1 the previous year s network of stores of the competitor does not have a direct effect on the profit of a firm but the firm s own network of stores at previous year does affect its profit because the existence of sunk entry costs and economies of density in these costs and 2 firms beliefs are unbiased in those markets that are close in a geographic sense to the opponent s network of stores though beliefs are unrestricted and potentially biased for unexplored markets which are farther away from the competitors network our estimates show significant evidence of biased beliefs furthermore imposing the restriction of unbiased beliefs generates a substantial attenuation bias in the estimate of competition effects

on the theory of strategic voting many analyses of plurality rule elections predict the complete coor dination of strategic voting and hence support for only two candidates here i suggest that stable multi candidate support will arise in equilibrium a group of voters must partially coordinate behind one of two challenging candidates in order to dislodge a disliked incumbent in a departure from existing models the popular support for each challenger is uncertain this support must be inferred from the private observation of informative signals such as the social communication of pref erences throughout the electorate or the imperfect observation of opinion polls the uniquely stable voting equilibrium entails only limited strategic voting and hence incomplete coordination this is due to the surprising presence of negative feed back an increase in the degree of strategic voting by others reduces the incentives for an individual to vote strategically the incentive to vote strategically is lower in relatively marginal elections after controlling for the distance from contention of a trailing preferred challenger a calibration of the model applied to the uk general election of 1997 is consistent with the impact of strategic voting and the reported accuracy of voters understanding of the electoral situation it suggests that nearly 50 seats may have been lost by the conservative party due to strategic voting 1 plurality rule elections and strategic voting 1 1 strategic voting and duverger s law plurality rule elections where the winner is the candidate who receives the largest number of votes are vulnerable to strategic voting a voter might well switch away from her preferred candidate and toward a perceived leader in the hope of exerting a greater influence over the outcome of the election this phenomenon has long been the focus of both economic and political scientific study in an influential essay riker 1982b cited droop s 1871 eloquent exposition of the strategic voting problem 1 i oer my grateful thanks to the many friends colleagues seminar participants referees and editors who have oered insightful comments during the long gestation of this paper its antecedents and companion work special thanks go to steve fisher whose empirical analysis of strategic voting raised many of the questions that i seek to answer in this paper and to chris wallace this particular paper brings together much of the analysis previously circulated in the papers a new theory of strategic voting strategic voting under the qualified majority rule and idiosyncrasy information and the impact of strategic voting

coordination failures and the lender of last resort was bagehot right after all the classical doctrine of the lender of last resort lolr elaborated by bagehot 1873 asserts that the central bank should lend to illiquid but solvent banks under certain conditions several authors have argued that this view is now obsolete in modern interbank markets a solvent bank cannot be illiquid this paper provides a possible theoretical foundation for rescuing bagehot s view our theory does not rely on the multiplicity of equilibria that arises in classical models of bank runs we built a model of banks liquidity crises that possesses a unique bayesian equilibrium in this equilibrium there is a positive probability that a solvent bank cannot find liquidity assistance in the market we derive policy implications about banking regulation solvency and liquidity ratios and interventions of the lender of last resort furthermore we find that public bailout and private bail in involvement are complementary in implementing the incentive efficient solution and that bagehot s lender of last resort facility must work together with institutions providing prompt corrective action and orderly failure resolution finally we derive similar implications for an international lender of last resort ilolr jel g21 g28

strategic complementarities and the twin crises the economic literature has emphasized the role of strategic complementarities in generating banking crises and currency crises motivated by evidence from recent financial crises we study a model where strategic complementarities exist not only within a group of creditors or within a group of currency speculators but also between the two groups the additional type of strategic complementarities generates a vicious cycle between banking crises and currency crises this vicious cycle magnifies the correlation between the two crises and destabilizes the economy we discuss some empirical implications and policy implications and in particular show that due to the interaction between the banking sector and the currency market a lender of last resort might not be able to prevent bank runs

ambiguity and perceived coordination in a global game in a global game larger ambiguity is shown to decrease the amount of coordination each player perceives consequently small uncertainty tends to select the pareto dominated equilibrium of the game without uncertainty implications for models of financial crises are drawn

rationalizability learning and equilibrium in games with strategic complementarities we study a rich class of noncooperative games that includes models of oligopoly competition macroeconomic coordination failures arms races bank runs technology adoption and diffusion r d competition pretrial bargaining coordination in teams and many others for all these games the sets of pure strategy nash equilibria correlated equilibria and rationalizable strategies have identical bounds also for a class of models of dynamic adaptive choice behavior that encompasses both best response dynamics and bayesian learning the players choices lie eventually within the same bounds these bounds are shown to vary monotonically with certain exogenous parameters we study the class of noncooperative supermodular games introduced by topkis 1979 and further analyzed by vives 1985 1989 who also pointed out the importance of these games in industrial economics supermodular games are games in which each player s strategy set is partially ordered the marginal returns to increasing one s strategy rise with increases in the competitors strategies so that the game exhibits strategic complementarity 2 and if a player s strategies are multidimensional marginal returns to any one com ponent of the player s strategy rise with increases in the other components this class turns out to encompass many of the most important economic applications of noncooperative game theory in macroeconomics diamond s 1982 search model and bryant s 1983 1984 rational expectations models can be represented as supermodular games in each of these models more activity by some members of the economy raises the returns to increased levels of activity by others in oligopoly theory some models of bertrand oligopoly with differentiated products qualify as supermodu lar games in these games when a firm s competitors raise their prices the marginal profitability of the firm s own price increase rises a similar structure is present in games of new technology adoption such as those of dybvig and spatt 1983 farrell and saloner 1986 and katz and shapiro 1986 when more users hook into a communication system or more manufacturers adopt an interface standard the marginal return to others of doing the same often rises similarly in some specifications of the bank runs model introduced by diamond and dybvig 1983 when more depositors withdraw their funds from a bank it is more worthwhile for other depositors to do the same in the warrant exercise

contagion of a liquidity crisis between two firms abstract this paper presents a model in which the contagion of a liquidity crisis between two nonfinancial institutions occurs because of learning activity within a common creditor pool after creditors observe what occurs in a rollover game for a firm they conjecture one another s type or attitude toward the risk associated with the firm s investment project creditors inference about one another s type then influences their decision to lend to the next firm by providing an analysis of the incidence of failure the threshold for a liquidity crisis for each firm this paper demonstrates that the risk of contagion increases sharply if it originates ex ante from a firm facing a low probability of failure in addition the paper proposes some policy measures for mitigating the severity of contagion during a liquidity crisis

catalytic finance when does it work in a model of debt crisis caused partly by creditor coordination failure we show that bailouts that reduce ex post inefficiency will sometimes enhance the incentives for governments to take costly adjustment effort this model helps us understand a debate about the role of the imf in catalyzing lending to developing countries

rollover risk as market discipline a two sided inefficiency abstract why does the market discipline that financial intermediaries face seem too weak during booms and too strong during crises this paper shows in a general equilibrium setting that rollover risk as a disciplining device is effective only if all intermediaries face purely idiosyncratic risk however if assets are correlated a two sided inefficiency arises good aggregate states have intermediaries taking excessive risks while bad aggregate states suffer from costly fire sales the driving force behind this inefficiency is an amplifying feedback loop between asset values and market discipline in equilibrium financial intermediaries inefficiently amplify both positive and negative aggregate shocks

coordination risk and the price of debt abstract creditors of a distressed borrower face a coordination problem even if the fundamentals are sound fear of premature foreclosure by others may lead to pre emptive action undermining the project recognition of this problem lies behind corporate bankruptcy provisions across the world and it has been identified as a culprit in international financial crises but has received scant attention from the literature on debt pricing without common knowledge of fundamentals the incidence of failure is uniquely determined provided that private information is precise enough this affords a way to price the coordination failure comparative statics on the unique equilibrium provides several insights on the role of information and the incidence of inefficient liquidation

crises and prices information aggregation multiplicity and volatility crises are volatile times when endogenous sources of information are closely monitored we study the role of information in crises by introducing a financial market in a coordination game with imperfect information the asset price aggregates dispersed private information acting as a public noisy signal in contrast to the case with exogenous information our main result is that uniqueness may not obtain as a perturbation from perfect information multiplicity is ensured with small noise in addition we show that a multiplicity may emerge in the financial price itself b less noise may contribute toward nonfundamental volatility even when the equilibrium is unique and c similar results obtain for a model where individuals observe one another s actions highlighting the importance of endogenous information more generally