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Sunspots in Global Games: Theory and Experiment

Author

Listed:
  • Heinemann, Frank

    (TU Berlin)

  • Moradi, Homayoon

    (WZB Berlin)

Abstract

We solve and test experimentally a global-games model of speculative attacks where agents can choose whether to read, at a cost, a payoff irrelevant (sunspot) announcement. Assuming that subjects exogenously believe some others to follow sunspots, we provide conditions for a unique equilibrium where agents follow a sunspot announcement depending on the realization of an informative private signal. Although most groups converge to classical global-game strategies that neglect sunspots, we find that about one-third of groups are eventually coordinating on sunspots, which is inconsistent with the standard theory. In line with the assumption of subjects expecting others to follow sunspots, subjects overestimate the number of subjects who follow sunspots by about 100% on average. We conclude that in environments with high strategic uncertainty, payoff irrelevant signals can affect behavior even if they are costly to obtain and not expected to be publicly observed.

Suggested Citation

  • Heinemann, Frank & Moradi, Homayoon, 2018. "Sunspots in Global Games: Theory and Experiment," Rationality and Competition Discussion Paper Series 135, CRC TRR 190 Rationality and Competition.
    • Handle: RePEc:rco:dpaper:135
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    References listed on IDEAS

    as
    1. Heinemann, Frank & Illing, Gerhard, 2002. "Speculative attacks: unique equilibrium and transparency," Journal of International Economics, Elsevier, vol. 58(2), pages 429-450, December.
    2. John Duffy & Eric O'N. Fisher, 2005. "Sunspots in the Laboratory," American Economic Review, American Economic Association, vol. 95(3), pages 510-529, June.
    3. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    4. Antonio Cabrales & Rosemarie Nagel & Roc Armenter, 2007. "Equilibrium selection through incomplete information in coordination games: an experimental study," Experimental Economics, Springer;Economic Science Association, vol. 10(3), pages 221-234, September.
    5. Greiner, Ben, 2004. "An Online Recruitment System for Economic Experiments," MPRA Paper 13513, University Library of Munich, Germany.
    6. Jasmina Arifovic & Janet Hua Jiang, 2014. "Do Sunspots Matter? Evidence from an Experimental Study of Bank Runs," Staff Working Papers 14-12, Bank of Canada.
    7. Frank Heinemann & Rosemarie Nagel & Peter Ockenfels, 2004. "The Theory of Global Games on Test: Experimental Analysis of Coordination Games with Public and Private Information," Econometrica, Econometric Society, vol. 72(5), pages 1583-1599, September.
    8. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
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    Cited by:

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    More about this item

    Keywords

    creditor coordination; global games speculative attack; sunspots;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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