The Signaling Role of Leaders in Global Games

TL;DR

This paper examines how leaders' signaling influences coordination in global games, establishing conditions for unique, efficient equilibria and discussing implications for phenomena like technology adoption and revolutions.

Contribution

It provides a necessary and sufficient condition for equilibrium uniqueness in leader-follower global games with signaling, extending understanding of coordination and efficiency.

Findings

Unique equilibrium is $ ext{Δ}$-rationalizable and fully efficient under certain conditions.

Equilibrium remains unique with noisy signals, though full efficiency may not hold.

Implications for real-world phenomena such as green technology adoption and currency crises.

Abstract

How important are leaders' actions in facilitating coordination? In this paper, we investigate their signaling role in a global games framework. A perfectly informed leader and a team of followers face a coordination problem. Despite the endogenous information generated by the leader's action, we provide a necessary and sufficient condition that makes the monotone equilibrium strategy profile uniquely $\Delta$-rationalizable and hence guarantees equilibrium uniqueness. Moreover, the unique equilibrium is fully efficient. This result remains valid when the leader observes a noisy signal about the true state except full efficiency may not be obtained. We discuss the implications of our results for a broad class of phenomena such as adoption of green technology, currency attacks and revolutions.