Dynamic interventions and informational linkages |
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| Institution: | 1. University of Chicago Booth School of Business United States;2. Stanford University Graduate School of Business United States;3. University of North Carolina Kenan-Flagler Business School United States;1. John Chambers College of Business and Economics, West Virginia University, P.O. Box 6025, Morgantown, WV 26506, United States;2. College of Business, Florida International University, Modesto A. Maidique Campus, 11200 S.W. 8th St, RB 208B Miami, FL 33199, United States;3. Miami Herbert Business School, University of Miami, 514E Jenkins Building, 5250 University Drive Coral Gables, FL 33124, United States;1. Jesse H. Jones School of Business at Rice University, 321 McNair Hall, MS 531, 6100 Main Street, Houston, TX 77005, USA;2. US Securities and Exchange Commission, 100 F St NE, Washington, DC 20549, USA;3. Michael G. Foster School of Business at the University of Washington, 428 PACCAR Hall, Box 353226, Seattle, WA 98195, USA;1. University of Colorado, United States;2. University of Michigan, United States;3. Federal Reserve Bank of Chicago, United States;4. NBER, United States;1. Vanderbilt University. VU Station B, Box 351819, Nashville, TN 37235, USA;2. KAIST College of Business. 85 Hoegiro, Dongdaemun-Gu, Seoul 02455, Republic of Korea;1. CEPR, United Kingdom;2. Institute for Financial Management, University of Bern, Office 214, Engehaldenstrasse 4, Bern CH - 3012, Switzerland;1. Krannert School of Management, Purdue University, 403W. State Street, West Lafayette, IN 47907, United States;2. Harvard University and NBER, Harvard Business School, Baker Library 359, Boston, MA 02163, United States |
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| 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. |
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