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Are Sunspots Learnable? An Experimental Investigation in a Simple General-Equilibrium Model

  • Jasmina Arifovic
  • George Evans
  • Olena Kostyshyna

We conduct experiments with human subjects in a model with a positive production externality in which productivity is a non-decreasing function of the average level of employment of other firms. The model has three steady states: the low and high steady states are expectationally stable (E-stable), and thus locally stable under learning, while the middle steady state is not E-stable. There also exists a locally E-stable sunspot equilibrium that fluctuates between the high and low steady states. Steady states are payoff ranked: low values give lower profits than higher values. We investigate whether subjects in our experimental economies can learn a sunspot equilibrium. Our experimental design has two treatments: one in which payoff is based on the firm’s profits, and the other in which payoff is based on the forecast squared error. We observe coordination on the extrinsic announcements in both treatments. In the treatments with forecast squared error, the average employment and average forecasts of subjects are closer to the equilibrium corresponding to the announcement. Cases of apparent convergence to the low and high steady states are also observed.

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Paper provided by Bank of Canada in its series Working Papers with number 13-14.

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Length: 36 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:bca:bocawp:13-14
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