Money illusion and coordination failure

Publikation: Bidrag til tidsskriftTidsskriftartikelfagfællebedømt

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
OriginalsprogEngelsk
TidsskriftGames and Economic Behavior
Vol/bind58
Udgave nummer2
Sider (fra-til)246-268
ISSN0899-8256
DOI
StatusUdgivet - 2007

Bibliografisk note

JEL Classification: C9, E32, E52

ID: 330781