In Diamond's model, people will only climb trees to pick coconuts if they believe that enough other people are also doing it.
The Diamond coconut model is an economic model constructed by the American economist and 2010 Nobel laureate Peter Diamond which analyzes how a search economy in which traders cannot find partners instantaneously operates. The model was first presented in a 1982 paper published in the Journal of Political Economy. The main implication of the model is that people's expectations as to the level of aggregate activity play a crucial role in actually determining this level of aggregate economic activity. A frequent interpretation of its conclusion, as applied to the labor market, is that the so-called natural rate of unemployment may not be unique (in fact there may exist a continuum of "natural rates") and even if it is unique, it may not be efficient. Diamond's model was of interest to New Keynesian economists who saw it as potential source of coordination failure, which could cause markets to fail to clear.[1]
The model takes its name from the abstract set up imagined by Diamond. He envisioned an island (a closed economy) populated by individuals who only consume coconuts. Coconuts are obtained by being picked (they are "produced") from palm trees at a cost. Because of a particular taboo existing on this island a person who has picked a coconut cannot consume it themselves but must find another person with a coconut. At that point the two individuals can trade their respective coconuts and eat them. The key point is that when an individual finds a palm tree, because climbing the tree is costly, they will only be willing to climb it to get a coconut if there are a sufficiently high number of other individuals who are willing to do likewise. If nobody else is obtaining coconuts then there won't be any potential trading partners and obtaining coconuts is not worth climbing the tree. Hence, what individuals believe others will do plays a crucial role in determining the overall outcome. As a result, people's (fully rational) expectations become a self-fulfilling prophecy and the economy can wind up with multiple equilibria, most if not all of them characterized by inefficiency.
^"Mankiw, N Gregory and Romer, David. "Introduction." New Keynesian Economics. Vol. 1. 1991.
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