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Speculative attacks and financial architecture: experimental analysis of coordination games with public and private information

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  • Heinemann, Frank
  • Nagel, Rosemarie
  • Ockenfels, Peter

Abstract

Speculative Attacks can be modeled as a coordination game with multiple equilibria if the state of the economy is common knowledge. With private information there is a unique equilibrium. This raises the question whether public information may be destabilizing by allowing for self-fulfilling beliefs. We present an experiment that imitates a speculative attacks model and compare sessions with public and private information. In both treatments subjects use so-called threshold strategies that lie in between the risk dominant and payoff dominant equilibrium of the underlying complete information game. Our evidence suggests that there are no destabilizing effects due to public information. In contrary, predictability of attacks is slightly higher with public than with private information, but prior probability of attacks is also higher with public information. We also test the predictive power of refinement theories to explain actual behavior and reactions to parameter changes.

Suggested Citation

  • Heinemann, Frank & Nagel, Rosemarie & Ockenfels, Peter, 2002. "Speculative attacks and financial architecture: experimental analysis of coordination games with public and private information," LSE Research Online Documents on Economics 24935, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:24935
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    References listed on IDEAS

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    1. John C. Harsanyi & Reinhard Selten, 1988. "A General Theory of Equilibrium Selection in Games," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262582384, January.
    2. Morris, Stephen & Shin, Hyun Song, 1998. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," American Economic Review, American Economic Association, vol. 88(3), pages 587-597, June.
    3. Obstfeld, Maurice, 1996. "Models of currency crises with self-fulfilling features," European Economic Review, Elsevier, vol. 40(3-5), pages 1037-1047, April.
    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. Nagel, Rosemarie, 1995. "Unraveling in Guessing Games: An Experimental Study," American Economic Review, American Economic Association, vol. 85(5), pages 1313-1326, December.
    6. Hubert, Franz & Schäfer, Dorothea, 2002. "Coordination Failure with Multiple-Source Lending: The Cost of Protection against a Powerful Lender," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 256-275.
    7. John B. Van Huyck & Raymond C. Battalio & Richard O. Beil, 1991. "Strategic Uncertainty, Equilibrium Selection, and Coordination Failure in Average Opinion Games," The Quarterly Journal of Economics, Oxford University Press, vol. 106(3), pages 885-910.
    8. Frank Heinemann, 2000. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks: Comment," American Economic Review, American Economic Association, vol. 90(1), pages 316-318, March.
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    Citations

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    Cited by:

    1. Christina E. Bannier, 2003. "Privacy or Publicity - Who Drives the Wheel?," Game Theory and Information 0309006, EconWPA.
    2. Fellner, Gerlinde & Guth, Werner & Maciejovsky, Boris, 2004. "Illusion of expertise in portfolio decisions: an experimental approach," Journal of Economic Behavior & Organization, Elsevier, vol. 55(3), pages 355-376, November.
    3. Sanchez Villalba, Miguel, 2017. "Global Inspection Games (GIG) in the laboratory," MPRA Paper 80715, University Library of Munich, Germany.
    4. Christian Hellwig, 2002. "Imperfect Common Knowledge of Preferences in Global Coordination Games (October 2002)," UCLA Economics Online Papers 211, UCLA Department of Economics.

    More about this item

    Keywords

    Coordination game; Global game; Payoff dominance; Private information; Public information; Risk dominance; Strategic uncertainty; Supermodular game;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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