Are Sunspots Learnable? An Experimental Investigation in a Simple General-Equilibrium Model
George Evans () and
Staff Working Papers from Bank of Canada
We conduct experiments with human subjects in a model with a positive production externality in which productivity is a non-decreasing function of the average level of employment of other firms. The model has three steady states: the low and high steady states are expectationally stable (E-stable), and thus locally stable under learning, while the middle steady state is not E-stable. There also exists a locally E-stable sunspot equilibrium that fluctuates between the high and low steady states. Steady states are payoff ranked: low values give lower profits than higher values. We investigate whether subjects in our experimental economies can learn a sunspot equilibrium. Our experimental design has two treatments: one in which payoff is based on the firm’s profits, and the other in which payoff is based on the forecast squared error. We observe coordination on the extrinsic announcements in both treatments. In the treatments with forecast squared error, the average employment and average forecasts of subjects are closer to the equilibrium corresponding to the announcement. Cases of apparent convergence to the low and high steady states are also observed.
Keywords: Economic; models (search for similar items in EconPapers)
JEL-codes: D83 G20 (search for similar items in EconPapers)
Pages: 36 pages
New Economics Papers: this item is included in nep-dge, nep-exp and nep-for
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:13-14
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