Speculative Attacks and Financial Architecture: Experimental Analysis of Coordination Games with Public and Private Information

Abstract

Speculative Attacks can be modelled 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. Our evidence suggests that there is no reason to belief that public information leads to self-fulfilling beliefs. Predictability of attacks is slightly higher with public than with private information, but prior probability of attacks is also higher with public information.

Statistical tests reject payoff dominance, risk dominance and maximum strategies as selection criteria. With public information subjects coordinate on equilibria somewhere between payoff dominant and risk dominant equilibrium. Reactions to parameter changes go into the directions predicted by risk dominance. Observed strategies can be explained by independent beliefs on other subjects attacking with a given probability.

Keywords: coordination game, global game, payoff dominance, private information, public information, risk dominance, strategic uncertainty, supermodular game

JEL Classification: C72, C91, E58