You better play 7: mutual versus common knowledge of advice in a weak-link experiment

This paper presents the results of an experiment on mutual versus common knowledge of advice in a two-player weak-link game with random matching. Our experimental subjects play in pairs for thirteen rounds. After a brief learning phase common to all treatments, we vary the knowledge levels associated with external advice given in the form of a suggestion to pick the strategy supporting the payoff- dominant equilibrium. Our results are somewhat surprising and can be summarized as follows: in all our treatments both the choice of the efficiency-inducing action and the percentage of efficient equilibrium play are higher with respect to the control treatment, revealing that even a condition as weak as mutual knowledge of level 1 is sufficient to significantly increase the salience of the efficient equilibrium with respect to the absence of advice. Furthermore, and contrary to our hypothesis, mutual knowledge of level 2 induces, under suitable conditions, successful coordination more frequently than common knowledge

Informational Herding and Optimal Experimentation

We show that far from capturing a formally new phenomenon, informational herding is really a special case of single-person experimentation -- and 'bad herds' the typical failure of complete learning. We then analyze the analogous team equilibrium, where individuals maximize the present discounted welfare of posterity. To do so, we generalize Gittins indices to our non-bandit learning problem, and thereby characterize when contrarian behaviour arises: (i) While herds are still constrained efficient, they arise for a strictly smaller belief set. (ii) A log-concave log-likelihood ratio density robustly ensures that individuals should lean more against their myopic preference for an action the more popular it becomes.Bayesian learning, value function, herding, experimentation, log concavity, Gittins index, team equilibrium

The learning curve in a competitive industry.

We consider the learning curve in an industry with free entry and exit, and price-taking firms. A unique equilibrium exists if the fixed cost is positive. While equilibrium profits are zero, mature firms earn rents on their learning, and, if costs are convex, no firm can profitably enter after the date the industry begins. Under some cost and demand conditions, however, firms may have to exit the market despite their experience gained earlier. Furthermore identical firms facing the same prices may produce different quantities. The market outcome is always socially efficient, even if dictates that firms exit after learning. Finally, actual and optimal industry concentration does not always increase in the intensity of learning.Learning curve; Industry evolution; Perfect competition;

Money Illusion and Coordination Failure

Economists long considered money illusion to be largely irrelevant. Here we show, however, that money illusion has powerful effects on equilibrium selection. If we represent payoffs in nominal terms, choices converge to the Pareto inefficient equilibrium; however, if we lift the veil of money by representing payoffs in real terms, the Pareto efficient equilibrium is selected. We also show that strategic uncertainty about the other players' behavior is key for the equilibrium selection effects of money illusion: even though money illusion vanishes over time if subjects are given learning opportunities in the context of an individual optimization problem, powerful and persistent effects of money illusion are found when strategic uncertainty prevails.money illusion, coordination failure, equilibrium selection, multiple equilibria, coordination games

Money illusion and coordination failure

Economists long considered money illusion to be largely irrelevant. Here we show, however, that money illusion has powerful effects on equilibrium selection. If we represent payoffs in nominal terms, choices converge to the Pareto inefficient equilibrium; however, if we lift the veil of money by representing payoffs in real terms, the Pareto efficient equilibrium is selected. We also show that strategic uncertainty about the other players' behavior is key for the equilibrium selection effects of money illusion: even though money illusion vanishes over time if subjects are given learning opportunities in the context of an individual optimization problem, powerful and persistent effects of money illusion are found when strategic uncertainty prevails.Money illusion, coordination failure, equilibrium selection, multiple equilibria, coordination games

Persistent inequality when learning requires a minimal standard of living

This paper studies the persistence of wealth and utility inequality in a dynamicmodel of skill acquisition with complete credit markets and rational, perfectly altruistic,dynastic utility-maximization, when efficient learning requires a minimal standardof living. The main result is that, if the minimal standard of living is not triviallysmall, at any stationary equilibrium without intergenerational mobility there are?poor?, unskilled and ?rich?, skilled dynasties. Members of rich dynasties inherit morefrom their parents than members of poor dynasties. The former in general acquireskill, while the latter remain unskilled, and - most importantly - members of rich familiesalso enjoy strictly higher utility than members of poor dynasties. This paper studies the persistence of wealth and utility inequality in a dynamicmodel of skill acquisition with complete credit markets and rational, perfectly altruistic,dynastic utility-maximization, when efficient learning requires a minimal standardof living. The main result is that, if the minimal standard of living is not triviallysmall, at any stationary equilibrium without intergenerational mobility there are?poor?, unskilled and ?rich?, skilled dynasties. Members of rich dynasties inherit morefrom their parents than members of poor dynasties. The former in general acquireskill, while the latter remain unskilled, and - most importantly - members of rich familiesalso enjoy strictly higher utility than members of poor dynasties