infonet-economy

Sentiment indices, such as measures of consumer confidence, are often discussed as potential indicators of future investment, consumption and growth. However, documenting a causal relationship between consumer confidence and output — and understanding the precise nature of the relationship — using field data has been challenging. We rely on the high degree of control afforded by a laboratory setting to experimentally test a simple model of investment with complementarities and time-varying fundamentals. Our experiment manipulates the presence of aggregate confidence measures to test both how they reflect available information and how they influence future output. We find that an aggregate sentiment measure can be as effective as a highly precise exogenous public signal in coordinating behavior on more efficient equilibria. Furthermore, our analysis indicates that the confidence measure also impacts expectations by influencing beliefs about aggregate investment.