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Equilibrium Dominance in Experimental Financial Markets

Charles Bram Cadsby¹; Murray Frank^2,3; Vojislav Maksimovic⁴

¹ University of Guelph · ² Hong Kong University of Science and Technology · ³ University of Hong Kong · ⁴ University of Maryland, College Park

We examine the predictive power of equilibrium dominance in experimental markets where firms with investment opportunities have an informational advantage over potential investors and are permitted to purchase a money-burning signal. Equilibrium dominance often fails to predict well when a Pareto-superior sequential equilibrium is also available. Instead, equilibrium selection appears to be related to the potential earnings of a more valuable firm that can signal its type successfully by defecting from the sequential equilibrium. Potential investors formulate their bids for firm equity based primarily on expectations formed adaptively in response to signaling choices made by firms.

DOI

10.1093/rfs/11.1.189

Volume

11 (1)

Pages

189-232

Language

en

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BibTeX

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