Endogenous Information Acquisition in Coordination Games

In the context of a “beauty contest” coordination game (in which payoffs 1 depend on the quadratic distance of actions from an unobserved state variable and 2 from the average action) players choose how much costly attention to pay to vari3 ous informative signals. Each signal has an underlying accuracy (how precisely it 4 identifies the state) and a clarity (how easy it is to understand). The unique linear 5 equilibrium has interesting properties: the signals which receive attention are the 6 clearest available, even if they have poor underlying accuracy; the number of sig7 nals observed falls as the complementarity of players’ actions rises; and, if actions 8 are more complementary, the information endogenously acquired in equilibrium 9 is more public in nature. The consequences of “rational inattention” constraints on 10 information transmission and processing are also studied. JEL codes: C72, D83. 11 1. COORDINATION AND INFORMATION ACQUISITION 12 In many scenarios of social-scientific interest, decision makers seek actions which are 13 matched to both some unknown underlying feature of the world (a “fundamental” mo14 tive) and also matched to the actions taken by others (a “coordination” motive). Put 15 somewhat more crudely, when modelled as a game the players wish to do the right thing 16 (match the action to the fundamental) and do it together (coordinate with others’ actions). 17 In such scenarios, the participants may welcome any information which helps them to re18 solve uncertainty about the state of the world and the likely actions of others. 19 When information is costly an actor must balance the cost of information against its ben20 efit; that benefit depends on the likely action choices of others, and so on the information 21 which others acquire. If others pay close attention to an information source, then their 22 actions will respond strongly to it; if their actions are to be predicted then knowledge of 23 the information source is useful; hence, the coordination motive prompts a player to seek 24 to know what other players know. In a two-stage listening-then-acting environment, this 25 paper asks: to which information sources do players listen, and how do their information 26 acquisition decisions respond to the properties of their environment? 27 1The authors thank colleagues, especially Torun Dewan, seminar participants, the editor Andrea Prat, and particularly two anonymous referees for their helpful comments and constructive suggestions.