Public Information Precision and Coordination Failure: An Experiment
67 Pages Posted: 26 Jun 2015 Last revised: 29 Apr 2016
Date Written: April 25, 2016
More precise public disclosure reduces uncertainty about economic fundamentals, but it can increase uncertainty about other agents' actions, leading to coordination failure. We conducted a laboratory experiment to study the effects of public information precision and strategic complementarity on coordination failure. Information precision is operationalized in terms of ``granularity'' (level of detail). We found that: (i) granular public disclosure, which is disaggregated and precise, increases the likelihood of coordination failure and decreases coordination efficiency when public information is pessimistic about future economic prospects; (ii) the deleterious effect of granular disclosure is stronger when strategic complementarity is high; and (iii) higher levels of strategic complementarity decrease coordination efficiency. Overall, the observed likelihood of coordination failure is higher and coordination efficiency is lower than predicted by theory. Our findings have implications for the Federal Reserve's decision to publicly disclose detailed stress test results for distressed banks, and the debate on whether the PCAOB should publicly release reports on firm-specific quality-control deficiencies of audit firms.
Keywords: coordination failure, transparency, information granularity, global game, heterogenous information, strategic uncertainty, experiment
JEL Classification: C92, D82, D84, E58
Suggested Citation: Suggested Citation