Double overreaction in beauty contests with information acquisition: Theory and experiment

Abstract

Central banks’ disclosures, such as forward guidance, have a weaker effect on the economy in reality than that predicted in theoretical models. In a beauty contest with information acquisition, we show that strategic complementarities give rise to a double overreaction to public disclosures by increasing agents' equilibrium level of attention, which, in turn, increases the weight assigned to the disclosures in agents’ equilibrium action. A laboratory experiment provides evidence that the effect of strategic complementarities on participants’ realised level of attention and realised action is qualitatively consistent with the theoretical predictions.