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Market-Based Solutions to Vital Economic Issues
Research
Nov 26, 2017

Dynamic Interventions and Informational Linkages

Abstract

We model a dynamic economy with strategic complementarity among investors and study how endogenous government interventions mitigate coordination failures. We establish equilibrium existence and uniqueness, and we 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. Moreover, saving smaller funds disproportionally more can generate greater informational benefits at smaller costs.

Note: Research papers posted on SSRN, including any findings, may differ from the final version chosen for publication in academic journals.


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