Coordination in the Presence of Asset Markets

37 Pages Posted: 22 Mar 2008 Last revised: 28 Oct 2017

See all articles by Shimon Kogan

Shimon Kogan

Massachusetts Institute of Technology (MIT) - Sloan School of Management; IDC Herzliya - Arison School of Business

Anthony M. Kwasnica

Smeal College of Business

Roberto A. Weber

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

Date Written: March 18, 2008

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.

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

JEL Classification: C72, C92, E32, G12

Suggested Citation

Kogan, Shimon and Kwasnica, Anthony Mark and Weber, Roberto A., Coordination in the Presence of Asset Markets (March 18, 2008). American Economic Review, Vol. 101, No. 2, 2011. Available at SSRN: https://ssrn.com/abstract=1108039 or http://dx.doi.org/10.2139/ssrn.1108039

Shimon Kogan (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Ave. E62-663
Cambridge, MA 02142
United States

IDC Herzliya - Arison School of Business ( email )

P.O. Box 167
Herzliya, 46150
Israel

Anthony Mark Kwasnica

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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