Measuring Agents' Reaction to Private and Public Information in Games with Strategic Complementarities

No 2947, CESifo Working Paper Series from CESifo

Abstract: In games with strategic complementarities, public information about the state of the world has a larger impact on equilibrium actions than private information of the same precision, because the former is more informative about the likely behavior of others. This may lead to welfare-reducing ‘overreactions’ to public signals. We present an experiment based on a game of Morris and Shin (2002), in which agents’ optimal actions are a weighted average of the fundamental state and their expectations of other agents’ actions. We measure the responses to public and private signals and find that, on average, subjects put a larger weight on the public signal. However, the weight is smaller than in equilibrium and closer to level-2 reasoning. Stated second order beliefs indicate that subjects underestimate the information contained in public signals about other players’ beliefs, but this can account only for a part of the observed deviation of behavior from equilibrium. In the extreme case of a pure coordination game, subjects still use their private signals, preventing full coordination. Reconsidering the welfare effects of public and private information theoretically, we find for level-2 reasoning that increasing precision of public signals always raises expected welfare, while increasing precision of private signals may reduce expected welfare if coordination is socially desirable.

Keywords: coordination games; strategic uncertainty; private information; public information; higher-order beliefs; levels of reasoning (search for similar items in EconPapers)
JEL-codes: C92 D82 D84 (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://www.cesifo.org/DocDL/cesifo1_wp2947.pdf (application/pdf)

Related works:
Journal Article: Measuring agents’ reaction to private and public information in games with strategic complementarities (2014)
Working Paper: Measuring agents' reaction to private and public information in games with strategic complementarities (2014)
Working Paper: Measuring Agents' Reaction to Private and Public Information in Games with Strategic Complementarities (2014)
Working Paper: Measuring Agents’ Reaction to Private and Public Information in Games with Strategic Complementarities (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_2947

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().