Abstract

We model a dynamic economy with strategic complementarity among investors and government interventions that mitigate coordination failures. We establish equilibrium existence and uniqueness, and show that one intervention can affect subsequent interventions through altering public information structures. Our results suggest that optimal policy should emphasize initial interventions because coordination outcomes tend to correlate. Neglecting informational externalities of initial interventions results in over- or under-interventions. Moreover, some funds are “too big to save first”, because saving smaller funds first costs less and generates greater informational benefits. Our paper is applicable to intervention programs such as those during the 2008 financial crisis.

• Keyword(s):
• economics 46
• policy 19