Competing to Coordinate : Crowding Out in Coordination Games

This paper develops a framework for coordination games that accounts for the role of competition. When crowding out is severe, agents no longer find it optimal to coordinate when everyone else participates. Our setup allows for the characterization of equilibrium outcomes when payoffs are subject to any degree of crowding out and presents a set of comparative statics with respect to the substitutability feature. The model highlights the impact of competition in coordination games, wherein substitutability lowers individual payoffs from coordinating. In many common global game contexts, accounting for the crowding out of payoffs changes widely held intuitions on strategies and on policy implications. For example, in the context of speculative currency attacks, selling a currency after receiving a sufficiently bad signal about reserves may no longer be a dominant strategy; in the presence of substitutability, setting a quota on how many speculators can attack may increase the chance of abandoning the peg; currencies with potentially small depreciation but ample liquidity can be subject to more pressure than currencies with potentially large depreciation but low liquidity