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Local Discouragement and Global Collapse: A Theory of Coordination Avalanches

Thomas D. Jeitschko and Curtis R. Taylor
The American Economic Review
Vol. 91, No. 1 (Mar., 2001), pp. 208-224
Stable URL: http://www.jstor.org/stable/2677905
Page Count: 17
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Local Discouragement and Global Collapse: A Theory of Coordination Avalanches
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Abstract

We Study a dynamic game in which all players initially possess the same information and coordinate on a high level of activity. Eventually, players with a long string of bad experiences become inactive. This prospect can cause a coordination avalanche in which all activity in the population stops. Coordination avalanches are part of Pareto-efficient equilibria; they can occur at any point in the game; their occurrence does not depend on the true state of nature; and allowing players to exchange information may merely hasten their onset. We present applications to search markets, organizational meltdown, and inefficient computer upgrades.

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