Double Overreaction in Beauty-Contests With Information Acquisition: Theory and Experiment

WP 1932 – November 2019

53 Pages Posted: 7 Dec 2019 Last revised: 3 Apr 2020

See all articles by Romain Baeriswyl

Romain Baeriswyl

Ludwig Maximilian University of Munich (LMU)

Kene Boun My

University of Strasbourg - Bureau of Economic Theory and Application (BETA); University of Strasbourg

Camille Cornand

Groupe d'Analyse et de Théorie Economique (GATE), CNRS, University of Lyon

Date Written: November 21, 2019

Abstract

Central banks' disclosures, such as forward guidance, have a weaker effect on the economy in reality than in theoretical models. The present paper contributes to understanding how people pay attention and react to various sources of information. In a beauty-contest with information acquisition, we show that strategic complementarities give rise to a double overreaction to public disclosures by increasing agents equilibrium attention, which, in turn, increases the weight assigned to them in equilibrium action. A laboratory experiment provides evidence that the effect of strategic complementarities on the realized attention and the realized action is qualitatively consistent with theoretical predictions, though quantitatively weaker. Both the lack of attention to public disclosures and a limited level of reasoning by economic agents account for the weaker realized reaction. This suggests that it is just as important for a central bank to control reaction to public disclosures by swaying information acquisition by recipients as it is by shaping information disclosures themselves.

Keywords: beauty-contest, information acquisition, overreaction, central bank communication

JEL Classification: D82, E52, E58

Suggested Citation

Baeriswyl, Romain and Boun My, Kene and Cornand, Camille, Double Overreaction in Beauty-Contests With Information Acquisition: Theory and Experiment (November 21, 2019). WP 1932 – November 2019, Available at SSRN: https://ssrn.com/abstract=3491096 or http://dx.doi.org/10.2139/ssrn.3491096

Romain Baeriswyl (Contact Author)

Ludwig Maximilian University of Munich (LMU) ( email )

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539
Germany

Kene Boun My

University of Strasbourg - Bureau of Economic Theory and Application (BETA) ( email )

France

University of Strasbourg ( email )

61, avenue de la foret noire
4, rue Blaise Pascal
Strasbourg, Alsace 3000
France

Camille Cornand

Groupe d'Analyse et de Théorie Economique (GATE), CNRS, University of Lyon ( email )

93 Chemin des Mouilles
Ecully, 69130
France

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