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American Economic Review Vol. 101 No. 2 2011

Coordination in the Presence of Asset Markets

Shimon Kogan1; Anthony M. Kwasnica2; Roberto A. Weber3

1 Department of Finance, McCombs School of Business, 1 University Station, B6600, Austin, TX 78712. · 2 Smeal College of Business, The Pennsylvania State University, 332 Business, University Park, PA 16802. · 3 Department of Social and Decision Sciences, Carnegie Mellon University, Pittsburgh, PA 15101.

Abstract

We explore the relationship between outcomes in a coordination game and a pre-play asset market where asset values are determined by outcomes in the subsequent coordination game. Across two experiments, we vary the payoffs from the market relative to the game, the degree of interdependence in the game, and whether traders' asset payoffs are dependent on outcomes in their own or another game. Markets lead to significantly lower efficiency across treatments, even when they produce no distortion of incentives in the game. Market prices forecast game outcomes. Our experiments shed light on how financial markets may influence affiliated economic outcomes.

DOI
10.1257/aer.101.2.927
Volume
101
Issue
2
Pages
927-947
Language
en
Sources
openalex bibtex:phds-export.bib crossref

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