19 - Engendering change

Summary

When the decentralized decisions of individual agents in the economy lead to two or more equilibria that can be Pareto ranked, the problem of coordination failure is possible. The economy could be trapped at a low-efficiency equilibrium requiring the government, or some other external party, to intervene in an attempt to coordinate the actions of agents to reach a more efficient equilibrium. Recently, such situations have been given renewed interest in formal economic theory (see Cooper and John 1988, Gans 1991). Although this literature has been able to characterize the economic conditions that lead to coordination failure and hence the need for intervention, virtually no attention has been given to what this need entails theoretically. It is my goal in this chapter to make a start at addressing theoretically the particulars of facilitating transition between equilibria.

To restate: In its coordinating role, a government needs to convince individuals to change their behavior in order to facilitate an escape from a low equilibrium trap. A low-efficiency equilibrium is a problem because it is stable, but unlike, for example, the equilibrium in a pure public goods problem, it is not globally stable. This means that if individuals can be persuaded to change their behavior by a sufficient amount, the conditions for a successful escape can be met and a virtuous cycle can begin. But changing individuals' behavior to provide the basis necessary for escape involves changing their expectations and beliefs. These very beliefs have accommodated to the lower equilibrium, leading individuals to take actions to reinforce those beliefs. Thus the goal of government policy is to break the hold of accommodation by enough to form the basis for an escape.