Noisy leadership: An experimental approach

We examine the strategic behavior of leaders and followers in sequential duopoly experiments with errors in communication: followers either perfectly observe the leaders’ actions or else they observe nothing. Consistent with the theory, the leaders in our experiments enjoy a greater first-mover advantage when followers observe their actions with higher probability, albeit their advantage is weaker than the theory predicts and is only weakly increasing with the probability that their actions will be observed. Our results also show that (i) when informed, followers hardly ever underreact to the leaders’ quantities but tend to overreact slightly, and (ii) when uninformed, followers try to predict leaders’ quantities and react optimally. This suggests that followers view the symmetric Cournot outcome as “fair,” and when informed, “punish” leaders who try to exploit their first-mover advantage. In turn, such punishments by overreactions induce leaders to behave more softly than the theory predicts. © 2006 Elsevier Inc. All rights reserved. JEL classification: C72; C91