Speculation Rather than Enterprise? Keynes’ Beauty Contest Revisited in Theory and Experiment
GATE Lyon Saint-Etienne, Working Paper 1712, March 2017
48 Pages Posted: 9 Mar 2017 Last revised: 29 Apr 2018
Date Written: April 1, 2018
In Keynes’ beauty contest, agents make evaluations reflecting both an expected fundamental value and the conventional value expected to be set by the market. They thus respond to fundamental and coordination motives, respectively, the prevalence of either being set exogenously. Our contribution is twofold. First, we propose a valuation game in which agents strategically choose how to weight each motive. This game emphasises public information leads agents to favour the coordination motive. Second, we test the game through a laboratory experiment. Subjects tend to conform to theoretical predictions, except when fundamental uncertainty is low relative to strategic uncertainty.
Keywords: dispersed information, public information, beauty contest, coordination, experiment
JEL Classification: D84, C92, E12
Suggested Citation: Suggested Citation