Coordination in the Presence of Asset Markets

Abstract:     
We study the relationship between economic activity, modeled by a minimum-effort coordination game, and asset markets in which securities' values correspond to outcomes of the activity. We explore both theoretically and experimentally how final prices and asset holdings in the market influence and forecast outcomes in the coordination game. We vary the incentives from the market relative to payoffs from the game, the number of players playing the game, and whether traders' payoffs are influenced by outcomes in their own game or another game. In our experiments, markets lead to significantly lower (and inefficient) group outcomes across all treatments. Market prices are informative about group outcomes and the market helps avoid "wasted effort" in which players make choices higher than the group minimum.

Number of Pages in PDF File: 37

Keywords: Equilibrium Selection, Asset Prices, Coordination Games, Experimental Economics

JEL Classification: C72, C92, E32, G12

working papers series