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Coordination in the Presence of Asset Markets

  • Shimon Kogan
  • Anthony M. Kwasnica
  • Roberto A. Weber

We explore the relationship between outcomes in a coordination game and a pre-play asset market where asset values are determined by outcomes in the subsequent coordination game. Across two experiments, we vary the payoffs from the market relative to the game, the degree of interdependence in the game, and whether traders' asset payoffs are dependent on outcomes in their own or another game. Markets lead to significantly lower efficiency across treatments, even when they produce no distortion of incentives in the game. Market prices forecast game outcomes. Our experiments shed light on how financial markets may influence affiliated economic outcomes. (JEL C91, D83, G13, G14)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.101.2.927
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 101 (2011)
Issue (Month): 2 (April)
Pages: 927-47

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Handle: RePEc:aea:aecrev:v:101:y:2011:i:2:p:927-47
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  1. Yacine Ait-Sahalia & Andrew W. Lo, 1995. "Nonparametric Estimation of State-Price Densities Implicit in Financial Asset Prices," NBER Working Papers 5351, National Bureau of Economic Research, Inc.
  2. Cooper, Russell & John, Andrew, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, MIT Press, vol. 103(3), pages 441-63, August.
  3. Harrison, Glenn W & Hirshleifer, Jack, 1989. "An Experimental Evaluation of Weakest Link/Best Shot Models of Public Goods," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 201-25, February.
  4. V. Crawford, 2010. "Adaptive Dynamics in Coordination Games," Levine's Working Paper Archive 404, David K. Levine.
  5. Van Huyck John B. & Battalio Raymond C. & Beil Richard O., 1993. "Asset Markets as an Equilibrium Selection Mechanism: Coordination Failure, Game Form Auctions, and Tacit Communication," Games and Economic Behavior, Elsevier, vol. 5(3), pages 485-504, July.
  6. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  7. Roberto A. Weber, 2006. "Managing Growth to Achieve Efficient Coordination in Large Groups," American Economic Review, American Economic Association, vol. 96(1), pages 114-126, March.
  8. Blume, Andreas & Ortmann, Andreas, 2007. "The effects of costless pre-play communication: Experimental evidence from games with Pareto-ranked equilibria," Journal of Economic Theory, Elsevier, vol. 132(1), pages 274-290, January.
  9. 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, 09.
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