Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/30728 
Year of Publication: 
2010
Series/Report no.: 
CESifo Working Paper No. 2947
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
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.
Subjects: 
coordination games
strategic uncertainty
private information
public information
higher-order beliefs
levels of reasoning
JEL: 
C92
D82
D84
Document Type: 
Working Paper
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