Tractable dynamic global games and applications

We present a family of tractable dynamic global games and its applications. Agents privately learn about a fixed fundamental, and repeatedly adjust their investments while facing frictions. The game exhibits many externalities: payoffs may depend on the volume of investment, on its volatility, and on its concentration. The solution is driven by an invariance result: aggregate investment is (in a pivotal contingency) invariant to a large family of frictions. We use the invariance result to examine how frictions, including those similar to the Tobin tax, affect equilibrium. We identify conditions under which frictions discourage harmful behavior without compromising investment volume. ∗Early drafts of this manuscript circulated under the title “Sand in the Wheels: A Dynamic GlobalGame Approach”. We have benefited from comments by Sylvain Chassang, Federico Echenique, Eugen Kováč, Filip Matějka, David Myatt, Alessandro Pavan, József Sákovics, Ennio Stacchetti, Colin Stewart, Jonathan Weinstein, and from audiences at Edinburgh, NYU, HECER in Helsinki, the University of Texas at Austin, the Kansas Theory Workshop, the Midwest theory conference at Vanderbilt, and the conferences “Information and Coordination: Theory and Applications”, EEA-ESEM in OSLO, and SED in Cyprus. Rossella Argenziano and Siyang Xiong provided excellent comments as discussants. †[email protected] ‡[email protected]