Believe it or Not: Experimental Evidence on Sunspot Equilibria with Social Networks

Abstract

Models with sunspot equilibria have long been a topic of interest among economists. It then became an interesting question to ask whether there is empirical support for their existence. One approach to answer this question is through lab experiments. Such equilibria have been successfully reproduced in the lab, but little is known about their determinants and, most importantly, about their convergence dynamics: when, and how, do individuals assign a coordination role to signals which are publicly known to have no fundamental value? In order to answer this question, we run a laboratory experiment in which individuals, connected through a network, directly observe the actions of their neighbors as well as aggregated information. By manipulating both the type of information available and the structure of the network, we show that general information about other players’ behavior hinders coordination, while information specifically related to the sunspot enhances it.

Keywords: sunspot equilibrium, Laboratory experiment, coordination, social networks, communication