EQUILIBRIUM DOMINANCE IN EXPERIMENTAL FINANCIAL-MARKETS

We examine the predictive power of equilibrium dominance in experiment al markets where firms with investment opportunities have an informati onal advantage over potential investors and are permitted to purchase a money-burning signal. Equilibrium dominance often fails to predict w ell when a Pareto-superior sequential equilibrium is also available. I nstead equilibrium selection appears to be related to the potential ea rnings of a more valuable firm that can signal its type successfully b y defecting from the sequential equilibrium Potential investors formul ate their bins for firm equity, based primarily on expectations formed adaptively in response to signaling choices made by firms.