The Power of Sunspots: An Experimental Analysis

46 Pages Posted: 13 Jan 2012

See all articles by Dietmar Fehr

Dietmar Fehr

Heidelberg University - Alfred Weber Institute for Economics

Frank Heinemann

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

Aniol Llorente-Saguer

Queen Mary University of London

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 2011

Abstract

We present an experiment in which extrinsic information (signals) may generate sunspot equilibria. The underlying coordination game has a unique symmetric non-sunspot equilibrium, which is also risk-dominant. Other equilibria can be ordered according to risk dominance. We introduce salient but extrinsic signals on which subjects may condition their actions. By varying the number of signals and the likelihood that different subjects receive the same signal, we measure how strong these signals affect behavior. Sunspot equilibria emerge naturally if there are salient public signals. Highly correlated private signals may also cause sunspot-driven behavior, even though this is no equilibrium. The higher the correlation of signals and the easier they can be aggregated, the more powerful they are in dragging behavior away from the risk-dominant to risk-dominated strategies. Sunspot-driven behavior may lead to welfare losses and exert negative externalities on agents, who do not receive extrinsic signals.

Keywords: coordination games, strategic uncertainty, sunspot equilibria, irrelevant information

JEL Classification: C72, C92, D84

Suggested Citation

Fehr, Dietmar and Heinemann, Frank and Llorente-Saguer, Aniol, The Power of Sunspots: An Experimental Analysis (December 1, 2011). MPI Collective Goods Preprint, No. 2011/33, Available at SSRN: https://ssrn.com/abstract=1983949 or http://dx.doi.org/10.2139/ssrn.1983949

Dietmar Fehr

Heidelberg University - Alfred Weber Institute for Economics ( email )

Grabengasse 14
Heidelberg, D-69117
Germany

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

Aniol Llorente-Saguer

Queen Mary University of London ( email )

Lincoln's Inn Fields
Mile End Rd.
London, E1 4NS
United Kingdom

HOME PAGE: http://https://sites.google.com/site/aniollls/

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