Limited higher order beliefs and the welfare effects of public information

Camille Cornand and Frank Heinemann

No 2013-039, SFB 649 Discussion Papers from Humboldt University Berlin, Collaborative Research Center 649: Economic Risk

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.

Keywords: coordination games; strategic uncertainty; private information; public information; higherorder beliefs; levels of reasoning (search for similar items in EconPapers)
JEL-codes: D82 D83 E52 E58 (search for similar items in EconPapers)
Date: 2013
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Related works:
Journal Article: Limited higher order beliefs and the welfare effects of public information (2015)
Working Paper: Limited higher order beliefs and the welfare effects of public information (2015)
Working Paper: Limited higher order beliefs and the welfare effects of public information (2013)
Working Paper: Limited higher order beliefs and the welfare effects of public information (2013)
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