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The Power of Sunspots: an Experimental Analysis

Author

Listed:
  • Fehr, Dietmar

    (University of Heidelberg)

  • Heinemann, Frank

    (Technical University of Berlin)

  • Llorente-Saguer, Aniol

    (Queen Mary University of London and CEPR)

Abstract

This paper presents an experiment on a coordination game with extrinsic random signals, in which we systematically vary the stochastic process generating these signals and measure how signals affect behavior. We find that sunspot equilibria emerge naturally if there are salient public signals. However, highly correlated private signals can also lead to sunspot-driven behavior, even when this is not an equilibrium. Private signals reduce the power of public signals as sunspot variables. The higher the correlation of extrinsic signals and the more easily they can be aggregated, the more powerful these signals are in distracting actions from the action that minimizes strategic uncertainty.

Suggested Citation

  • Fehr, Dietmar & Heinemann, Frank & Llorente-Saguer, Aniol, 2017. "The Power of Sunspots: an Experimental Analysis," Rationality and Competition Discussion Paper Series 11, CRC TRR 190 Rationality and Competition.
  • Handle: RePEc:rco:dpaper:11
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    More about this item

    Keywords

    Coordination games; strategic uncertainty; sunspot equilibria; forward guidance; expectations;

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E39 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Other
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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