Coordination failure
A group settles on an equilibrium that every member would rather leave, purely because each expects the others to stay, so nothing is wrong with the situation except the beliefs holding it in place.
Often misread asLooking for somebody who miscalculated, so the bad equilibrium gets explained by ignorance or irrationality rather than by the structure of the situation.
How to see it
Everyone acting sensibly, everyone worse off
Each person can be doing the right thing given what everyone else is doing, and the result can still be worse for every one of them than an alternative they could all have moved to together. Nobody is mistaken and nobody is irrational. The trouble is that no individual move improves anything.
The checkEveryone is playing a best response. What is missing is a way to move together, not better information or clearer heads.
Try itIn a bank run, ask whether a single depositor who stays put is made better off by staying while everyone else withdraws. If the answer is no, you have a coordination failure rather than a panic in the ordinary sense.
Games that show it
Know these first
Easily confused with
Sources
- Cooper, R. and John, A. (1988). Quarterly Journal of Economics 103(3), 441-463.
- Diamond, D. & Dybvig, P. (1983). Journal of Political Economy 91(3).