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Speculative attacks and financial architecture: experimental analysis of coordination games with public and private information

Heinemann, Frank, Nagel, Rosemarie and Ockenfels, Peter (2002) Speculative attacks and financial architecture: experimental analysis of coordination games with public and private information. Discussion paper, 416. Financial Markets Group, London School of Economics and Political Science, London, UK.

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Abstract

Speculative Attacks can be modeled as a coordination game with multiple equilibria if the state of the economy is common knowledge. With private information there is a unique equilibrium. This raises the question whether public information may be destabilizing by allowing for self-fulfilling beliefs. We present an experiment that imitates a speculative attacks model and compare sessions with public and private information. In both treatments subjects use so-called threshold strategies that lie in between the risk dominant and payoff dominant equilibrium of the underlying complete information game. Our evidence suggests that there are no destabilizing effects due to public information. In contrary, predictability of attacks is slightly higher with public than with private information, but prior probability of attacks is also higher with public information. We also test the predictive power of refinement theories to explain actual behavior and reactions to parameter changes.

Item Type: Monograph (Discussion Paper)
Official URL: http://fmg.lse.ac.uk
Additional Information: © 2002 The Authors
Library of Congress subject classification: H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
Journal of Economic Literature Classification System: C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C72 - Noncooperative Games
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies
C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C91 - Laboratory, Individual Behavior
Sets: Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Collections > LSE Financial Markets Group (FMG) Working Papers
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 416
Date Deposited: 20 Aug 2009 10:55
URL: http://eprints.lse.ac.uk/24935/

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