Strategic Uncertainty and the Power of Extrinsic Signals – Evidence from an Experimental Study of Bank Runs

Abstract

We investigate how the level of strategic uncertainty affects the coordination power of publicly observed extrinsic signals in a controlled laboratory environment in the context of a bank-run game. We run three treatments featuring different levels of strategic uncertainty. Although theory predicts that an equilibrium where agents’ choices and economic outcomes follow the realization of the extrinsic signal exists in all treatments, strong responses to the extrinsic signal occur only in the treatment where strategic uncertainty is high.

Keywords: Bank Runs, Extrinsic Signals, Sunspots, Experiment, Financial Crises, Strategic Uncertainty

JEL Classification: C92; E58; G20