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Limited Rationality and Strategic Interaction, The Impact of the Strategic Environment on Nominal


Fehr, Ernst; Tyran, Jean-Robert (2002). Limited Rationality and Strategic Interaction, The Impact of the Strategic Environment on Nominal. Working paper series / Institute for Empirical Research in Economics No. 130, University of Zurich.

Abstract

The evidence from many experiments suggests that people are heterogeneous with regard to their abilities to make rational, forward looking, decisions. This raises the question when the rational types are decisive for aggregate outcomes and when the boundedly rational types shape aggregate results. We examine this question in the context of a long-standing and important economic problem - the adjustment of nominal prices after an anticipated money shock. Our experiments show that when agents' actions are strategic substitutes adjustment to the new equilibrium is extremely quick whereas under strategic complementarity adjustment lasts very long and is associated with relatively large real effects. This adjustment difference occurs because price expectations are very flexible under substitutability and very sticky under complementarity. Our results suggest that strategic complementarity does not only provide incentives for the rational types to partly mimic the behavior of the boundedly rational types butnit also renders people less rational and forward looking. In addition, underncomplementarity people attribute less rationality to the other players.

Abstract

The evidence from many experiments suggests that people are heterogeneous with regard to their abilities to make rational, forward looking, decisions. This raises the question when the rational types are decisive for aggregate outcomes and when the boundedly rational types shape aggregate results. We examine this question in the context of a long-standing and important economic problem - the adjustment of nominal prices after an anticipated money shock. Our experiments show that when agents' actions are strategic substitutes adjustment to the new equilibrium is extremely quick whereas under strategic complementarity adjustment lasts very long and is associated with relatively large real effects. This adjustment difference occurs because price expectations are very flexible under substitutability and very sticky under complementarity. Our results suggest that strategic complementarity does not only provide incentives for the rational types to partly mimic the behavior of the boundedly rational types butnit also renders people less rational and forward looking. In addition, underncomplementarity people attribute less rationality to the other players.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Institute for Empirical Research in Economics (former)
Dewey Decimal Classification:330 Economics
Language:English
Date:November 2002
Deposited On:29 Nov 2011 21:26
Last Modified:05 Apr 2017 23:12
Series Name:Working paper series / Institute for Empirical Research in Economics
ISSN:1424-0459
Official URL:http://www.econ.uzh.ch/wp.html

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