Abstract

http://ssrn.com/abstract=495402
 
 

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Money Illusion and Coordination Failure


Ernst Fehr


University of Zurich - Department of Economics

Jean-Robert Tyran


University of Vienna; University of Copenhagen - Department of Economics; Centre for Economic Policy Research (CEPR)

February 1, 2004

IZA Discussion Paper No. 1013; CESifo Working Paper Series No. 1141; Zurich IEER Working Paper No. 177
Games and Economic Behavior, Vol. 58, No. 2, 2007

Abstract:     
Economists long considered money illusion to be largely irrelevant. Here we show, however, that money illusion has powerful effects on equilibrium selection. If we represent payoffs in nominal terms, choices converge to the Pareto inefficient equilibrium; however, if we lift the veil of money by representing payoffs in real terms, the Pareto efficient equilibrium is selected. We also show that strategic uncertainty about the other players' behavior is key for the equilibrium selection effects of money illusion: even though money illusion vanishes over time if subjects are given learning opportunities in the context of an individual optimization problem, powerful and persistent effects of money illusion are found when strategic uncertainty prevails.

Number of Pages in PDF File: 35

Keywords: money illusion, coordination failure, equilibrium selection, multiple equilibria, coordination games

JEL Classification: C9, E32, E52

working papers series


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Date posted: February 5, 2004 ; Last revised: May 10, 2013

Suggested Citation

Fehr, Ernst and Tyran, Jean-Robert, Money Illusion and Coordination Failure (February 1, 2004). IZA Discussion Paper No. 1013; CESifo Working Paper Series No. 1141; Zurich IEER Working Paper No. 177; Games and Economic Behavior, Vol. 58, No. 2, 2007. Available at SSRN: http://ssrn.com/abstract=495402 or http://dx.doi.org/10.2139/ssrn.495402

Contact Information

Ernst Fehr (Contact Author)
University of Zurich - Department of Economics ( email )
Blümlisalpstrasse 10
Zuerich, 8006
Switzerland
+41 1 634 3709 (Phone)
+41 1 634 4907 (Fax)
Jean-Robert Tyran
University of Vienna ( email )
Bruenner Strasse 72
Vienna, Vienna 1090
Austria
HOME PAGE: http://homepage.univie.ac.at/jean-robert.tyran/
University of Copenhagen - Department of Economics ( email )
Copenhagen University Library
Licenssekretariatet Nørre Alle 49
DK-2200 Copenhagen N.
Denmark
+45 353 23 027 (Phone)
HOME PAGE: http://www.econ.ku.dk/tyran/
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
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