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
Date Written: November 21, 2019
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: Suggested Citation