The Power of Sunspots: An Experimental Analysis

Dietmar Fehr, Frank Heinemann and Aniol Llorente-Saguer

No 2011_33, Discussion Paper Series of the Max Planck Institute for Research on Collective Goods from Max Planck Institute for Research on Collective Goods

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.

Keywords: coordination games; strategic uncertainty; sunspot equilibria; irrelevant information (search for similar items in EconPapers)
JEL-codes: C72 C92 D84 (search for similar items in EconPapers)
Date: 2011-12
New Economics Papers: this item is included in nep-cbe, nep-cta, nep-exp and nep-gth
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Journal Article: The power of sunspots: An experimental analysis (2019)
Working Paper: The Power of Sunspots: an Experimental Analysis (2017)
Working Paper: The power of sunspots: an experimental analysis (2013)
Working Paper: The power of sunspots: An experimental analysis (2011)
Working Paper: The Power of Sunspots: An Experimental Analysis (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:mpg:wpaper:2011_33

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