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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 illusi on 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.
Autor
Prof. Dr. Ernst Fehr
Jean-Robert Tyran
 
Working PaperFachbereichFachrichtung
2005VolkswirtschaftslehreEmpirische Wirtschaftsforschung
 
Schlagwörter
coordination failure, coordination games, equilibrium selection, money illusion, multiple equilibria