Document Type


Publication Date



Asset price bubbles, collective action problems, decision theory, deflation, debt deflation, financial markets, financial regulation, inflation, monetary policy, money markets, rational choice theory, recursive functions


Banking and Finance Law | Law and Economics


The hallmark of a collective action problem is its aggregating multiple individually rational decisions into a collectively irrational outcome. Arms races, “commons tragedies” and “prisoners’ dilemmas” are well-known, indeed well-worn examples. What seem to be less widely appreciated are two complementary propositions: first, that some collective action problems bear iterative, self-exacerbating structures that render them particularly destructive; and second, that some of the most formidable challenges faced by economies, societies, and polities are iteratively self-worsening problems of precisely this sort. Financial markets, monetary systems and macroeconomies in particular are rife with them – as are other complex systems subject to group-mediated procyclicalities or “feedback” effects.

I call the mentioned challenges “recursive collective action problems,” and show that a great many familiar regulatory and policy challenges – including asset price bubbles and busts, consumer price hyperinflations and debt deflations, “paradoxes of thrift” and “recessionary spirals” – constitute instances of this general phenomenon. I also hazard suggestions as to how best to address such challenges. Key to the effort is first to recognize their shared structure, second to recognize that collective action problems require coherent collective agency for their solution, and third to recognize that the collective agents in question must act to render no longer individually rational such decisions as aggregate into collectively irrational outcomes.

I close with specific examples of what problem-solving strategies informed by the “three recognitions” will tend to look like. The implications for macroeconomic and “macroprudential” finance-regulatory policy in particular are manifold. If we but attend to the shared nature, structure, and pervasiveness of recursive collective action problems, I conclude, we can recoup much in the way of wealth and wellbeing that is now needlessly lost.