Coordination in the Presence of Asset Markets

51 Pages Posted: 16 Feb 2009

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)

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Date Written: February 13, 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

Suggested Citation

Kogan, Shimon and Kwasnica, Anthony Mark and Weber, Roberto A., Coordination in the Presence of Asset Markets (February 13, 2009). Available at SSRN: https://ssrn.com/abstract=1342811 or http://dx.doi.org/10.2139/ssrn.1342811

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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