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Title:The power of sunspots: An experimental analysis PDF Logo
Authors:Fehr, Dietmar
Heinemann, Frank
Llorente-Saguer, Aniol
Issue Date:2011
Series/Report no.:Preprints of the Max Planck Institute for Research on Collective Goods 2011,33
Abstract:We present an experiment in which extrinsic information (signals) may generate sunspot equilibria. The underlying coordination game has a unique symmetric non-sunspot equilibrium, which is also risk-dominant. Other equilibria can be ordered according to risk dominance. We introduce salient but extrinsic signals on which subjects may condition their actions. By varying the number of signals and the likelihood that different subjects receive the same signal, we measure how strong these signals affect behavior. Sunspot equilibria emerge naturally if there are salient public signals. Highly correlated private signals may also cause sunspot-driven behavior, even though this is no equilibrium. The higher the correlation of signals and the easier they can be aggregated, the more powerful they are in dragging behavior away from the risk-dominant to risk-dominated strategies. Sunspot-driven behavior may lead to welfare losses and exert negative externalities on agents, who do not receive extrinsic signals.
Subjects:strategic uncertainty
coordination games
sunspot equilibria
irrelevant information
JEL:C92
C72
D84
Document Type:Working Paper
Appears in Collections:Preprints of the Max Planck Institute for Research on Collective Goods

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