How Do Market Prices and Cheap Talk Affect Coordination?
Journal of Accounting Research, Forthcoming
49 Pages Posted: 21 Aug 2013
There are 2 versions of this paper
How Do Market Prices and Cheap Talk Affect Coordination?
How Do Market Prices and Cheap Talk Affect Coordination?
Date Written: July 15, 2013
Abstract
In many scenarios such as banking and liquidity crises, inefficiencies often arise because investors face uncertainties about economic fundamentals and the strategies of other investors. How information affects fundamental uncertainty is well studied, but how information affects strategic uncertainty is underexplored. This paper examines how two communication mechanisms, market and cheap talk, affect investment decisions and efficiency in an experimental investment game with both fundamental and strategic uncertainty. I find that market does not improve coordination because the expectation that coordination failures will occur is self-fulfilling, while cheap talk improves coordination because the signals of willingness to invest alleviate strategic uncertainty.
Keywords: coordination game, global game, cheap talk, asset market, experimental economics, fundamental uncertainty, strategic uncertainty, insolvency, illiquidity
JEL Classification: C7, C9, D8
Suggested Citation: Suggested Citation