Unraveling Coordination Problems

TL;DR

This paper links policy design in coordination games to equilibrium selection, characterizing optimal subsidies that induce desired outcomes while accounting for strategic uncertainty and avoiding overly aggressive interventions.

Contribution

It introduces a novel characterization of subsidy schemes that ensure unique equilibrium implementation, differing from canonical results and emphasizing moderation under payoff uncertainty.

Findings

Optimal subsidies are unique and symmetric for identical players.

Subsidies are continuous functions of model parameters.

Overly aggressive interventions can cause coordination failure.

Abstract

Strategic uncertainty complicates policy design in coordination games. To rein in strategic uncertainty, the Planner in this paper connects the problem of policy design to that of equilibrium selection. We characterize the subsidy scheme that induces coordination on a given outcome of the game as its unique equilibrium. Optimal subsidies are unique, symmetric for identical players, continuous functions of model parameters, and do not make the targeted strategies strictly dominant for any one player; these properties differ starkly from canonical results in the literature. Uncertainty about payoffs impels policy moderation as overly aggressive intervention might itself induce coordination failure. JEL codes: D81, D82, D83, D86, H20. Keywords: mechanism design, global games, contracting with externalities, unique implementation.