Information quality and regime change: Evidence from the lab

We experimentally test the effects of information quality in a global game of regime change. The game features a payoff structure such that more dispersed private information induces agents to attack more often and reduces regime stability in the Bayesian Nash Equilibrium. We show that subjects in the lab do not play as predicted by equilibrium theory. Instead, more dispersed information makes subjects more cautious, increasing regime stability. We show that this finding is consistent with a modified global game model in which agents engage in level-k thinking. In the level-k model, information quality affects agents’ actions through a novel channel, that enables a strategic attenuation effect. As information quality worsens, strategic complementarities between different level-k types weaken, generating a force that is capable of reversing the comparative statics from the equilibrium model.