Signaling in Global Games

Abstract

This paper aims to study the impact of costly and private information acquisition in global games with applications in financial crisis (e.g. bank runs, currency crisis). While exogenous asymmetric information has been shown to select a unique equilibrium, we show that the endogenous costly information acquisition can lead to multiple equilibria. Moreover, we show complementarities in actions translate into complementarities in information acquisition. In addition, increasing number of in- formed agents increases the crisis probability, in particular when the fundamental is strong and agents are conservative. Also, the crisis probability decreases with strong fundamental or conservative agents. In contrast, it increases in stressful regimes. Finally, releasing a more precise public signal is not necessarily a good policy to avoid crisis, in particular when the fundamental is weak and agents are aggressive. Our analysis highlights the importance of endogenous and costly private information acquisition in crisis time.