The goal of the previous chapter was to provide an introduction to coordination games and some evidence on coordination failures. In the end, we find that coordination failures can arise in fairly simple experimental settings. While these experiments are certainly suggestive that coordination problems may arise, they leave open an important question: what are the underlying economic interactions that lead to coordination games?

The answer offered in this chapter takes the form of two abstract frameworks for analysis. The first, drawing upon Cooper and John [1988], stresses the interaction between agents in strategic settings where strategies are simply scalars in a closed interval. This formulation leads to a relatively straightforward equilibrium analysis, including conditions for multiple equilibria and some welfare results. The main point is that coordination games, such as those illustrated in the previous chapter, rest upon an interaction between agents termed strategic complementarity. As suggested already, this interaction implies that increased effort by other agents leads the remaining agent to follow suit. Besides becoming the basis for multiple equilibria, the strategic complementarity gives rise to multiplier effects.

The second part of the chapter looks at more general interactions. While almost all current macroeconomic applications of coordination games can be cast in the Cooper–John framework, the more general structure, investigated most recently by Milgrom and Roberts [1990] and Vives [1990], is quite powerful and worthy of study.

COOPER–JOHN MODEL

Cooper and John [1988] consider a game which highlights the key theme in this literature: the concept of strategic complementarity.