Inertial Coordination Games

Abstract: We analyze inertial coordination games: dynamic coordination games with an endogenously changing state that depends on (i) a persistent fundamental players privately learn about over time; and (ii) past play. The speed of learning determines long-run equilibrium dynamics: the risk-dominant action is played in the limit if and only if learning is slow such that posterior precisions grow sub-quadratically. This generalizes results from static global games and endows them with a learning foundation. Conversely, when learning is fast such that posterior precisions grow super-quadratically, shocks can propagate and generate self-fulfilling spirals.