Main fields: Experimental Economics, Microeconomics, Social Learning, Strategic Information Transmission
Common Knowledge of Rationality and Information Demand: an Experiment on Observational Learning and Information Consumption
Abstract: In this paper, we provide a novel approach to test the implications of common knowledge of rationality in dynamic games with imperfect information. We investigate this problem by testing the notion of impartial inference in observational learning (a special form of dynamic game with imperfect information) and how lacking confidence in other people’s strategic sophistication will generate information demand for cross-validating. In this experiment, we implement a classical observational learning game with different exogenous observational structures that may or may not provide access to redundant information. We control subjects’ beliefs about their opponents’ rationality by letting the subjects play with virtual players whose degrees of sophistication have been preprogrammed. We use different exogenous observational structure treatments to see whether redundant information helps subjects’ decisions. We use partially and completely endogenous observational structures to elicit subjects’ willingness to pay for information. We find that although there is no evidence that the redundant information helps subjects in their decision-making, they are willing to pay a higher price than predicted by equilibrium for it. We also find that overpricing is higher if subjects were previously given this information for free or if their confidence in their opponents’ sophistication is low.