Dynamic Interventions and Informational Linkages

Lin William Cong (叢林) Steven Grenadier, Yunzhi Hu, Steven Grenadier, Yunzhi Hu - Dec 30, 2016

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.
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coordination failures government intervention information design financial crisis global games