Money illusion and coordination failure
- Author(s)
- Ernst Fehr, Jean-Robert Tyran
- Abstract
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.
- Organisation(s)
- Department of Economics, Vienna Center for Experimental Economics
- External organisation(s)
- Universität Zürich (UZH)
- Journal
- Games and Economic Behavior
- Volume
- 58
- Pages
- 246–268
- No. of pages
- 23
- ISSN
- 0899-8256
- DOI
- https://doi.org/10.1016/j.geb.2006.04.005
- Publication date
- 2007
- Peer reviewed
- Yes
- Austrian Fields of Science 2012
- 502045 Behavioural economics, 502021 Microeconomics
- Portal url
- https://ucrisportal.univie.ac.at/en/publications/money-illusion-and-coordination-failure(0cc7185a-9c6d-492a-8988-0067dec82f28).html