Coordination in the Presence of Asset Markets
51 Pages Posted: 21 Mar 2009
Date Written: March 18, 2009
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: Suggested Citation