Money illusion and coordination failure
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Money illusion and coordination failure. / Fehr, Ernst; Tyran, Jean-Robert.
In: Games and Economic Behavior, Vol. 58, No. 2, 2007, p. 246-268.Research output: Contribution to journal › Journal article › Research › peer-review
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TY - JOUR
T1 - Money illusion and coordination failure
AU - Fehr, Ernst
AU - Tyran, Jean-Robert
N1 - JEL Classification: C9, E32, E52
PY - 2007
Y1 - 2007
N2 - 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 inferior 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
AB - 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 inferior 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
KW - Faculty of Social Sciences
KW - money illusion
KW - coordination failure
KW - equilibrium selection
KW - coordination games
U2 - 10.1016/j.geb.2006.04.005
DO - 10.1016/j.geb.2006.04.005
M3 - Journal article
VL - 58
SP - 246
EP - 268
JO - Games and Economic Behavior
JF - Games and Economic Behavior
SN - 0899-8256
IS - 2
ER -
ID: 330781