ESSAYS IN COORDINATION WITH ENDOGENOUS INFORMATION

This dissertation consists of two essays, aimed at providing a sound theoretical investigation of the signaling role of (observed) collective behavior in environments characterized by incomplete information and strategic complementarity. The effects of both endogenous signaling and (the disclosure of) exogenous public information on the degree of coordination failure that arises from decentralized decision-making are analyzed in-depth. In the first chapter I analyze a regime-change game, where an authoritarian government can influence popular support via the implementation of costly policies. Citizens can challenge the government via a riot, whose chances to succeed increase with the unknown average popular discontent. In order to fine-tune its policy-making, the regime needs reliable information about popular consensus. Such information, however, improves the ability of citizens to coordinate their revolt. I show that public information is ex ante beneficial for those regimes which are more likely to build consensus via policy-making in equilibrium. Higher levels of media freedom should therefore be observed in regimes that are neither too weak, nor too strong. In the second chapter I study a bank run model, where the informational efficiency of a (secondary) financial market pushes into insolvency an a priori solvent institution after a temporary, non-fundamental liquidity shock. The most pessimistic investors of an open-ended fund are allowed to ask for the early liquidation of their share after receiving private information about the economic fundamentals of the fund’s portfolio of assets. Some of the assets in portfolio are sold in the secondary market to meet those investors’ requests. Higher volumes of early redemptions decrease both the current price, via a standard law-of-demand effect, and the future price, by signaling bad news to the market. Anticipating such effect, less pessimistic investors, too, opt for early liquidation, thus further exacerbating the price spiral. Strategic complementarity arises endogenously when investors’ private information is sufficiently poor. In this case, a spiral of fire sales is observed in equilibrium.