Financial Contagion and the Wealth Effect: An Experimental Study

32 Pages Posted: 2 Mar 2020 Last revised: 3 Aug 2020

See all articles by Anna Bayona

Anna Bayona

ESADE Business School

Oana Peia

University College Dublin (UCD)

Date Written: January 1, 2020


We design a laboratory experiment to test the importance of wealth as a channel for financial contagion across markets with unrelated fundamentals. In a sequential global game,
we analyze the decisions of a group of investors that hold assets in two markets. We consider
two treatments that vary the level of diversification of these assets across markets. In both
treatments, we nd evidence of financial contagion. When investors have completely diver-
si ed portfolios, we provide evidence of contagion due to a wealth effect: for certain ranges
of fundamentals, we show that a decrease in wealth from the investment in the first mar-
ket makes withdrawals more likely in the second, thereby increasing the probability of a crisis.
When portfolio diversification is small, then social imitation is relevant in explaining contagion.

Keywords: Financial contagion, financial crises, wealth, coordination games, global games

JEL Classification: C72; C92; D8; G01; G11

Suggested Citation

Bayona, Anna and Peia, Oana, Financial Contagion and the Wealth Effect: An Experimental Study (January 1, 2020). Journal of Economic Behavior and Organization, Forthcoming, Available at SSRN: or

Anna Bayona (Contact Author)

ESADE Business School ( email )

Av. de Pedralbes, 60-62
Barcelona, 08034

Oana Peia

University College Dublin (UCD) ( email )

Belfield, Dublin 4 4

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