Economists long considered money illusion to be largely irrelevant. Here we show, however, that money illusion has powerful effects on equilibrium selection. If we represent payoffs in nominal terms, choices converge to the Pareto inefficient equilibrium; however, if we lift the veil of money by...

Theoretical models of social capital (David, Janiak, and Wasmer 2010; Bräuninger and Tolciu 2011) predict that communities may find themselves in one of two equilibria: one with a high level of local social capital and low migration or one with a low level of local social capital and high...

Under weak contract enforcement the trading parties' trust, defined as their belief in other's trustworthiness, appears important for realizing gains from trade. In contrast, under strong contract enforcement beliefs about other's trustworthiness appear less important, suggesting that trust and...

Under weak contract enforcement the trading parties' trust, defined as their belief in other's trustworthiness, appears important for realizing gains from trade. In contrast, under strong contract enforcement beliefs about other's trustworthiness appear less important, suggesting that trust and...

A sunspot variable is any random variable that is not related to fundamental factors of the economy but a potential coordination device. The coordination power of sunspots has been analysed in theory and in experiments. However, some have discussed whether sunspots, e.g., public announcements...