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Measuring Agents' Reaction to Private and Public Information in Games with Strategic Complementarities

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  • Camille Cornand
  • Frank Heinemann

Abstract

In games with strategic complementarities, public information about the state of the world has a larger impact on equilibrium actions than private information of the same precision, because the former is more informative about the likely behavior of others. This may lead to welfare-reducing ‘overreactions’ to public signals. We present an experiment based on a game of Morris and Shin (2002), in which agents’ optimal actions are a weighted average of the fundamental state and their expectations of other agents’ actions. We measure the responses to public and private signals and find that, on average, subjects put a larger weight on the public signal. However, the weight is smaller than in equilibrium and closer to level-2 reasoning. Stated second order beliefs indicate that subjects underestimate the information contained in public signals about other players’ beliefs, but this can account only for a part of the observed deviation of behavior from equilibrium. In the extreme case of a pure coordination game, subjects still use their private signals, preventing full coordination. Reconsidering the welfare effects of public and private information theoretically, we find for level-2 reasoning that increasing precision of public signals always raises expected welfare, while increasing precision of private signals may reduce expected welfare if coordination is socially desirable.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2947.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_2947

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Keywords: coordination games; strategic uncertainty; private information; public information; higher-order beliefs; levels of reasoning;

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Cited by:
  1. Romain Baeriswyl & Camille Cornand, 2011. "Reducing overreaction to central banks’ disclosures : theory and experiment," Working Papers, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure 1141, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  2. Davide Cianciaruso & Fabrizio Germano, 2011. "Quotient Spaces of Boundedly Rational Types," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1539, Northwestern University, Center for Mathematical Studies in Economics and Management Science.

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