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Double overreaction in beauty-contests with information acquisition: theory and experiment

Romain Baeriswyl, Kene Boun My () and Camille Cornand

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Abstract: Central banks' disclosures, such as forward guidance, have a weaker effect on the economy in reality than in theoretical models. The present paper contributes to understanding how people pay attention and react to various sources of information. In a beauty-contest with information acquisition, we show that strategic complementarities give rise to a double overreaction to public disclosures by increasing agents equilibrium attention, which, in turn, increases the weight assigned to them in equilibrium action. A laboratory experiment provides evidence that the effect of strategic complementarities on the realised attention and the realised action is qualitatively consistent with theoretical predictions, though quantitatively weaker. Both the lack of attention to public disclosures and a limited level of reasoning by economic agents account for the weaker realised reaction. This suggests that it is just as important for a central bank to control reaction to public disclosures by swaying information acquisition by recipients as it is by shaping information disclosures themselves.

Keywords: Overreaction; Information acquisition; Beauty-contest; Central bank communication (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-ban, nep-cba, nep-exp and nep-gth
Note: View the original document on HAL open archive server: https://hal.science/hal-03468857v1
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published in Journal of Monetary Economics, 2021, 118, pp.432-445. ⟨10.1016/j.jmoneco.2020.12.004⟩

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Journal Article: Double overreaction in beauty contests with information acquisition: Theory and experiment (2021) Downloads
Working Paper: Double overreaction in beauty contests with information acquisition: theory and experiment (2020) Downloads
Working Paper: Double overreaction in beauty-contests with information acquisition: theory and experiment (2019) Downloads
Working Paper: Double overreaction in beauty-contests with information acquisition: theory and experiment (2019) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03468857

DOI: 10.1016/j.jmoneco.2020.12.004

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