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

Romain Baeriswyl (), Kene Boun My () and Camille Cornand

No 2020-09, Working Papers from Swiss National Bank

Abstract: Central banks' disclosures, such as forward guidance, have a weaker effect on the economy in reality than that predicted 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 level of attention, which, in turn, increases the weight assigned to the disclosures in agents' equilibrium action. A laboratory experiment provides evidence that the effect of strategic complementarities on participants' realised level of attention and realised action is qualitatively consistent with the theoretical predictions, although 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 for a central bank seeking to control the reaction to its public disclosures, it is just as important to influence information acquisition by recipients as it is to shape the information disclosures.

Keywords: Central bank communication; information acquisition; beauty contest; overreaction (search for similar items in EconPapers)
JEL-codes: D82 E52 D58 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2020
New Economics Papers: this item is included in nep-exp and nep-gth
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Related works:
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 (2021)
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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