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Two main classes of channels are studied as informational sources of financial contagion. One is a fundamental channel that is based on real and financial links between economies, and the second is a social learning channel that arises when agents base their decisions on noisy observations about the actions of others in foreign markets. Using global games, I present a two‐country model of financial contagion in which both channels can operate and I test its predictions experimentally. The experimental results show that subjects do not extract information optimally, which leads to two systematic biases that affect these channels directly. Base‐rate neglect leads subjects to underweight their prior, and thus weakens the fundamental channel. An overreaction bias strengthens the social learning channel, since subjects rely on information about the behavior of others, even when this information is irrelevant. These results have significant welfare effects rooted in the specific way in which these biases alter behavior.

This paper studies the robustness of an equilibrium to incomplete information in binary‐action supermodular games. Using a generalized version of belief operator, we explore the restrictions that prior beliefs impose on higher order beliefs. In particular, we obtain a nontrivial lower bound on the probability of a common belief event, uniform over type spaces, when the underlying game has a monotone potential. Conversely, when the game has no monotone potential, we construct a type space with an arbitrarily high probability event in which players never have common belief about that event. As an implication of these results, we show for generic binary‐action supermodular games that an action profile is robust to incomplete information if and only if it is a monotone potential maximizer. Our study offers new methodology and insight to the analysis of global game equilibrium selection.

This paper develops a framework to assess how fear of miscoordination affects the sustainability of cooperation. Building on theoretical insights from Carlsson and van Damme (1993), it explores the effect of small amounts of private information on a class of dynamic cooperation games with exit. Lack of common knowledge leads players to second guess each other's behavior and makes coordination difficult. This restricts the range of equilibria and highlights the role of miscoordination payoffs in determining whether cooperation is sustainable or not. The paper characterizes the range of perfect Bayesian equilibria as the players' information becomes arbitrarily precise. Unlike in one-shot two-by-two games, the global games information structure does not yield equilibrium uniqueness.

Global games of regime change-coordination games of incomplete information in which a status quo is abandoned once a sufficiently large fraction of agents attack it-have been used to study crises phenomena such as currency attacks, bank runs, debt crises, and political change. We extend the static benchmark examined in the literature by allowing agents to take actions in many periods and to learn about the underlying fundamentals over time. We first provide a simple recursive algorithm for the characterization of monotone equilibria. We then show how the interaction of the knowledge that the regime survived past attacks with the arrival of information over time, or with changes in fundamentals, leads to interesting equilibrium properties. First, multiplicity may obtain under the same conditions on exogenous information that guarantee uniqueness in the static benchmark. Second, fundamentals may predict the eventual fate of the regime but not the timing or the number of attacks. Finally, equilibrium dynamics can alternate between phases of tranquility-where no attack is possible-and phases of distress-where a large attack can occur-even without changes in fundamentals.

The theory of global games has shown that coordination games with multiple equilibria may have a unique equilibrium if certain parameters of the payoff function are private information instead of common knowledge. We report the results of an experiment designed to test the predictions of this theory. Comparing sessions with common and private information, we observe only small differences in behavior. For common information, subjects coordinate on threshold strategies that deviate from the global game solution towards the payoff-dominant equilibrium. For private information, thresholds are closer to the global game solution than for common information. Variations in the payoff function affect behavior as predicted by comparative statics of the global game solution. Predictability of coordination points is about the same for both information conditions.

THIS PAPER IS yet another in a rapidly growing series (e.g. [2]-[11]) on strategic approaches to economic equilibrium. Our aim here is to make precise the remark implicitly due to Bertrand [1 or 10, Ch. 4, 5] that if the agents in an economy use price-setting strategies then the strategic Nash equilibria will, in fact, be Walrasian; and this without any assumption of a "large number of small agents." However, in our models, not only prices but also quantities are set by the agents. Thus it might actually be more appropriate to call them "Bertrand-Cournot" types of models. We begin with a standard Walras exchange economy with a finite number of traders and commodities. This is recast as a game in strategic form in essentially two different ways. There is a trading-post for each commodity to which traders send contingent statements about how much they wish to buy and sell, and at what prices. In Model 1, the trading point is determined by the intersection of the aggregate supply and demand curves. In Model 2, trade takes place so as to meet as many contingent statements as possible. Each buyer whose orders are filled pays the price he quoted, using a fiat money which can be borrowed costlessly and limitlessly. But after trade is over there is a settlement of accounts and a penalty is levied on those who are bankrupt. No attempt is made to model the penalty in any detail. It is simply described in the form of a disutility. But this in turn may be imagined to stem from confiscation of assets (see Remark 5) or the necessity of procuring highly-priced loans, etc. Call a noncooperative equilibrium "active" if it turns out that no trader is isolated, i.e., trapped as the sole buyer or seller at some trading-post. Then our results may be described as follows. In Model 1, the active2 N.E. of the game coincide with the C.E. of the market; furthermore there is a subset of tight, active N.E. which also coincide with the C.E., and each N.E. in this subset is strong