Currency Attack

(The contents of this page are provided by the Finance and Economics Experimental Laboratory at the University of Exeter.)

You may find the example subject instructions helpful.

• Level: Year ?1 undergraduate
• Pre-requisite knowledge: ?
• Suitable modules: ?

Abstract

Students play together in groups of seven investors who have to decide whether or not to attack a currency. The payoff for attacking a currency is increasing in the number of attackers, whereas the payoffs for not attacking does not depend on the number of attackers.

It pays an individual investor to attack only if sufficient others do so. There is an equilibrium where no one attacks and another one where everyone attacks. The payoffs vary between two settings such that different equilibria are reached for each setting.

Intended Learning Outcomes

1. Illustrate the relevance of coordination for macroeconomics.

2. Illustrate multiplicity of equilibria.

3. Illustrate what determines equilibrium selection.

Discussion of Likely Results

The two settings are with currency A or currency B. The payoffs for not attacking are £5 for currency A and £11 for currency B. The payoff for attacking is £2(N+1), where 0<=N<=6 is the number of others in the group who attack. It is profitable to attack currency A if just 2 others do so, whereas at least 5 others are needed for Currency B. This makes the 'attack' equilibrium more likely for A and the 'no attack' equilibrium more likely for B.

The instructor can configure three different versions of the game, which consists of a number of repeated rounds.

In the 'All Random' game, all the investors attack a single currency, either A or B, selected at random and different each round. Investors are told about the overall number of attacks, as well as the number within their own group of 7, e.g. overall 15 out of 19 attacked A and 4 of 6 others in own group attacked A. This game requires a minimum of 7 students.

In the 'Half Random' game, half of the investors attack currency A and the other half attack currency B, with a random matching of investors and currencies that changes each round. Investors are told about the overall number of attacks on both currencies, as well as the number within their own group of 7, e.g. overall 8 out of 10 attacked A, 1 out of 9 attacked B and 6 of 6 others in own group attacked A. This game requires a minimum of 14 students.

The 'Half Fixed' game is the same as 'Half Random', except that the matching of investors and currencies is fixed, staying the same each round.

Reference

Hazlett has a similar hand-run game.