Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/91593
Authors: 
Cornand, Camille
Heinemann, Frank
Year of Publication: 
2013
Series/Report no.: 
SFB 649 Discussion Paper 2013-039
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 as shown by Morris and Shin (2002). Recent experiments on games with strategic complementarities show that subjects attach a lower weight to public signals than theoretically predicted. Aggregate behavior can be better explained by a cognitive hierarchy model where subjects employ limited levels of reasoning. This paper analyzes the welfare effects of public information under limited levels of reasoning and argues that for strategies according with experimental evidence, public information that is more precise than private information cannot reduce welfare, unless the policy maker has instruments that are perfect substitutes to private actions.
Subjects: 
coordination games
strategic uncertainty
private information
public information
higherorder beliefs
levels of reasoning
JEL: 
D82
D83
E52
E58
Document Type: 
Working Paper

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