The Signaling Role of Leaders in Global Games

Abstract

How important are leaders' actions in facilitating coordination? In this paper, we investigate their signaling role in a global games framework. A perfectly informed leader and a team of followers face a coordination problem. Despite the endogenous information generated by the leader's action, we provide a necessary and sufficient condition that makes the monotone equilibrium strategy profile uniquely $\Delta$-rationalizable and hence guarantees equilibrium uniqueness. Moreover, the unique equilibrium is fully efficient. This result remains valid when the leader observes a noisy signal about the true state except full efficiency may not be obtained. We discuss the implications of our results for a broad class of phenomena such as adoption of green technology, currency attacks and revolutions.