Title

Information Transparency and Coordination Failure: Theory and Experiment

Department/School

Accounting

Date of this version

5-2004

Document Type

Article

Keywords

Information Transparency, Coordination Failure, Equilibrium Selection

Abstract

We examine the effect of higher order beliefs on the ability of decentralized decision makers to coordinate and take advantage of improvements in information transparency that can increase welfare. Theories that address this question have not been empirically explored. We study coordination in a laboratory experiment with privately informed decision makers. Economic outcomes in the setting depend both on agents' rational beliefs regarding economic fundamentals and on their rational beliefs regarding the beliefs of other agents. Increasing information transparency mitigates uncertainty about economic fundamentals but may increase strategic uncertainty, precipitating multiple equilibria and less efficient group outcomes. We provide evidence that sometimes the equilibrium attained by creditors is inferior from a welfare perspective to other available equilibria. Risk dominance appears to determine equilibrium selection in our setting.

Published in

Journal of Accounting Research

Citation/Other Information

Journal of Accounting Research, 2004, 42(2), pp. 159-195.