02274cam a22002537 4500001000700000003000500007005001700012008004100029100002000070245009100090260006600181490004200247500001600289520110400305530006101409538007201470538003601542690011701578690013101695710004201826830007701868856003801945856003701983w12076NBER20150421215859.0150421s2006 mau||||fs|||| 000 0 eng d1 aKing, Robert G.10aDiscretionary Policy and Multiple Equilibriah[electronic resource] /cRobert G. King. aCambridge, Mass.bNational Bureau of Economic Researchc2006.1 aNBER working paper seriesvno. w12076 aMarch 2006.3 aDiscretionary policymaking can foster strategic complementarities between private sector decisions, thus leading to multiple equilibria. This article studies a simple example, originating with Kydland and Prescott, of a government which must decide whether to build a dam to prevent adverse effects on floods on the incomes of residents of a floodplain. In this example, it is socially inefficient to build the dam and for people to live on the floodplain, with this outcome being the unique equilibrium under policy commitment. Under discretion, there are two equilibria. First, if agents believe that few of their fellow citizens will move to the floodplain, then they know that the government will choose not to build the dam and there is therefore no incentive for any individual to locate on the floodplain. Second, if agents believe that there will be many floodplain residents, then they know that the government will choose to build the dam and even small benefits of living on the floodplain will lead them to choose that location. In this second equilibrium, all individuals are worse off. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web. 7aE5 - Monetary Policy, Central Banking, and the Supply of Money and Credit2Journal of Economic Literature class. 7aE6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook2Journal of Economic Literature class.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w12076.4 uhttp://www.nber.org/papers/w1207641uhttp://dx.doi.org/10.3386/w12076