Economies with strategic competitive environments are prone to
inefficient sunspot-driven fluctuations triggered by autonomous changes
in firms equilibrium conjectures. We show that a well designed taxation-
subsidization scheme can eliminate these fluctuations by coordinating
firms conjectures on an efficient equilibrium. The particular taxation scheme
we propose has the feature of distorting payoff functions,
making unsustainable all other equilibrium configurations under lais-
sez faire while leaving unaffected the efficient equilibrium. Hence, it
acts as a pure selection mechanism. In contrast to most sunspot-driven
models in the literature, implementing this taxation scheme thus leads
to significant welfare gains equivalent, in our benchmark economy, to a
2 percent permanent increase in aggregate consumption. We decom-
pose these gains into two components: a "pure stabilization effect"
and an "efficient stabilization effect". We show that, from a quantita-
tive point of view, most of the welfare gains result from the efficient
stabilization effect. This effect, while potentially important, is typi-
cally ignored in the traditional computations of the welfare costs of
aggregate fluctuations (e.g., Lucas, 2003).