Local discouragement and global collapse: A theory of coordination avalanches

We study a dynamic game in which all players initially possess the same inf ormation and coordinate on a high level of activity. Eventually, players wi th a long string of bad experiences become inactive. This prospect can caus e a coordination avalanche in which all activity in the population stops. C oordination avalanches are part of Pareto-efficient equilibria; they can oc cur at any point in the game: their occurrence does nor depend on the true state of nature; and allowing players to exchange information may merely ha sten their onset. We present applications to search markets, organizational meltdown, and inefficient computer upgrades.