Coordinating Coordination Failures in Keynesian Models

TLDR

Strategic complementarities occur when an agent’s optimal strategy positively depends on others’ strategies. The paper examines how strategic complementarities in agents’ payoff functions underlie macroeconomic coordination failures. The authors extend an abstract game to a multisector, imperfectly competitive economy by incorporating strategic complementarities from production, matching, and commodity demand functions. Analysis reveals that such complementarities can generate multiple equilibria and a multiplier process, and these equilibria are often Pareto ranked.

Abstract

This paper focuses on the importance of strategic complementarities in agents' payoff functions as a basis for macroeconomic coordination failures. Strategic complementarities arise when the optimal strategy of an agent depends positively upon the strategies of the other agents. We first analyze an abstract game and find that multiple equilibria and a multiplier process may arise when strategic complementarities are present. Often these equilibria can be Pareto ranked. We then place additional economic content on the analysis of this game by considering strategic complementarities arising from production functions, matching technologies, and commodity demand functions in a multisector, imperfectly competitive economy.