Coordination in the Presence of Asset Markets

51 Pages Posted: 21 Mar 2009

See all articles by Shimon Kogan

Shimon Kogan

Reichman University - Arison School of Business; University of Pennsylvania - The Wharton School

Anthony M. Kwasnica

Florida State University - Department of Economics; Smeal College of Business

Roberto A. Weber

University of Zurich - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 2 versions of this paper

Date Written: March 18, 2009

Abstract

We explore both theoretically and experimentally how final prices and security holdings in an asset market influence and forecast behavior and outcomes in an affiliated coordination game. We vary the incentives from the market relative to payoffs from the game, the number of players in a group, and whether traders' payoffs are influenced by outcomes in their own or another group. Markets lead to significantly less efficient group outcomes across all treatments, even when the market produces little or no distortion of incentives in the game. At the same time, we find that asset markets are informative about group outcomes and thereby reduce "wasted input.'' Our experiment may therefore shed light on how financial markets themselves may contribute to economic crises.

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

JEL Classification: G12, C92

Suggested Citation

Kogan, Shimon and Kwasnica, Anthony Mark and Weber, Roberto A., Coordination in the Presence of Asset Markets (March 18, 2009). Available at SSRN: https://ssrn.com/abstract=1364469 or http://dx.doi.org/10.2139/ssrn.1364469

Shimon Kogan (Contact Author)

Reichman University - Arison School of Business ( email )

P.O. Box 167
Herzliya, 46150
Israel

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Anthony Mark Kwasnica

Florida State University - Department of Economics ( email )

Tallahassee, FL 30306-2180
United States

Smeal College of Business ( email )

Department of Risk Management
332 Business Building
University Park, PA 16802-3306
United States

Roberto A. Weber

University of Zurich - Department of Economics ( email )

Zuerich, 8006
Switzerland

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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