This chapter considers the conduct of economic policy in the presence of strategic complementarities and multiple equilibria. As highlighted in Cooper and John (1988), the existence of strategic complementarities in the choices of individual agents is present in many interactions. The presence of complementarities can lead to inefficiencies and, in the extreme, coordination failures and thus a rationale for intervention. The actions of a government may influence the selection of an equilibrium and the level of economic activity as well. So it is natural to consider economic policy and multiplicity jointly.

But determining optimal government policy in the presence of multiple equilibria is quite difficult due to problems in identifying structural parameters and in designing optimal policy when there are multiple Nash equilibria for a given policy. Here we formalize these issues and problems. In the context of the example of bank runs, we argue that policy interventions may allow researchers to resolve an important identification problem and thus distinguish shocks to fundamentals from variations in confidence.

To many economists, strategic complementarities are present in many economic and social interactions. On the social side, the languages we speak, our driving conventions, the bars, beaches and restaurants we choose to frequent, fashions, etc. are all driven by the presence of complementarities that lead us all, in effect, to “do what others are doing.”