This paper designs an optimal mechanism to correct coordination failure. A planner wants her agents to coordinate on a cooperative action. Agents gather noisy private information regarding the underlying fundamental and decide whether to cooperate or not. The global game literature uniquely identifies the chance of coordination failure when the coordination risk is concentrated at one point in time. We analyze the case when the planner diffuses the coordination risk over time. The planner approaches the agents sequentially -only a proportion of agents at a time and advancing further only when the coordination failure has been averted so far. The public information of survival works as a coordination device and helps in mitigating the coordination risk. We show that if the planner can diffuse the coordination risk enough, then she can achieve the first best as the unique equilibrium outcome. However, if the planner has only limited power to diffuse the coordination risk, multiple equilibria can arise. A maxmin planner should diffuse the coordination risk as much as possible. We also show that if some groups are more reluctant to cooperate than others, a max-min planner should approach the more reluctant groups first. Our mechanism is robust to various generalizations and can be applied to a wide range of coordination games. * We are extremely grateful to Douglas Gale and David Pearce for their substantial guidance and support throughout this project. We thank Viral Acharya, Jess Benhabib, Itay Goldstein, Zhiguo He, Laurent Mathevet, Cecilia Parlatore, Ennio Stacchetti, Laura Veldkamp, Neil Wallace for helpful comments and suggestions.

We consider bargaining environments in which public opinion provides leverage by making compromises costly. Two parties make initial demands, before knowing the public opinion. If deadlocked, they can bargain again after public opinion forms, but suffer reputation costs if they compromise, i.e., scale back their demands. We show that in equilibrium, parties may choose to make incompatible demands initially and gamble over public opinion even though one or both parties must bear a cost later. We characterize when deadlocks arise, and how this affects the welfare of the public in a representative two-party democracy compared to a direct democracy. (JEL C78, D72)

This paper designs an optimal mechanism to correct coordination failure. A planner wants her agents to coordinate on a cooperative action. Agents gather noisy private information regarding the underlying fundamental and decide whether to cooperate or not. The global game literature uniquely identifies the chance of coordination failure when the coordination risk is concentrated at one point in time. We analyze the case when the planner diffuses the coordination risk over time. The planner approaches the agents sequentially -only a proportion of agents at a time and advancing further only when the coordination failure has been averted so far. The public information of survival works as a coordination device and helps in mitigating the coordination risk. We show that if the planner can diffuse the coordination risk enough, then she can achieve the first best as the unique equilibrium outcome. However, if the planner has only limited power to diffuse the coordination risk, multiple equilibria can arise. A maxmin planner should diffuse the coordination risk as much as possible. We also show that if some groups are more reluctant to cooperate than others, a max-min planner should approach the more reluctant groups first. Our mechanism is robust to various generalizations and can be applied to a wide range of coordination games.

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Consistent with the Minsky hypothesis and the "volatility paradox" (Brunnermeier and Sannikov, 2014), recent empirical evidence suggests that financial crises tend to follow prolonged periods of financial stability and investor optimism. But does financial tranquility always call for more stringent regulation? We examine this question using a simple portfolio choice model that features the interaction between learning and externality. We evaluate the potential of a macroprudential policy in the form of a capital income tax to restore efficiency, and highlight a key challenge faced by regulators: whether the stringency of prudential policy should rise or fall over time depends on the resilience of the financial system, which is difficult to know and thus may lead to inefficient regulation. Our paper provides a simple framework to shed light on the current regulation debates, such as the ongoing debates on the financial deregulation initiatives in the U.S. (as evident in the August 2017 Jackson Hole meeting), and the discussions on how to regulate the rapidly-developing online finance industry in China. JEL Classification Numbers: G01, G18, G28