Measuring Agents' Reaction to Private and Public Information in Games with Strategic Complementarities

42 Pages Posted: 9 Mar 2010

See all articles by Camille Cornand

Camille Cornand

University of Lyon II; University of Angers - Institute of Economic Theory and Analysis (GATE)

Frank Heinemann

Berlin Institute of Technology; CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 2 versions of this paper

Date Written: February 2010

Abstract

In games with strategic complementarities, public information about the state of the world has a larger impact on equilibrium actions than private information of the same precision, because the former is more informative about the likely behavior of others. This may lead to welfare-reducing ‘overreactions’ to public signals. We present an experiment based on a game of Morris and Shin (2002), in which agents’ optimal actions are a weighted average of the fundamental state and their expectations of other agents’ actions. We measure the responses to public and private signals and find that, on average, subjects put a larger weight on the public signal. However, the weight is smaller than in equilibrium and closer to level-2 reasoning. Stated second order beliefs indicate that subjects underestimate the information contained in public signals about other players’ beliefs, but this can account only for a part of the observed deviation of behavior from equilibrium. In the extreme case of a pure coordination game, subjects still use their private signals, preventing full coordination. Reconsidering the welfare effects of public and private information theoretically, we find for level-2 reasoning that increasing precision of public signals always raises expected welfare, while increasing precision of private signals may reduce expected welfare if coordination is socially desirable.

Keywords: coordination games, strategic uncertainty, private information, public information, higher-order beliefs, levels of reasoning

JEL Classification: C92, D82, D84

Suggested Citation

Cornand, Camille and Heinemann, Frank, Measuring Agents' Reaction to Private and Public Information in Games with Strategic Complementarities (February 2010). CESifo Working Paper Series No. 2947. Available at SSRN: https://ssrn.com/abstract=1555607

Camille Cornand

University of Lyon II ( email )

93 Chemin des Mouilles
69676 Bron Cedex
France

University of Angers - Institute of Economic Theory and Analysis (GATE) ( email )

93 chemin des Mouilles
Monnaie et Finance at Lyon
69130 Ecully cedex
France

Frank Heinemann (Contact Author)

Berlin Institute of Technology ( email )

Strasse des 17. Juni 135
H 52
Berlin, 10623
Germany

HOME PAGE: http://www.macroeconomics.tu-berlin.de/Heinemann.html

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

Poschinger Str. 5
Munich, DE-81679
Germany

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