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

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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.

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en

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application/pdf

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http://eprints.lse.ac.uk/24935/1/dp416.pdf

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