Level-k models often assume that individuals employ a fixed depth of reasoning across different games. We study this assumption by having subjects make choices in five classes of games chosen to identify inconsistent depth of reasoning. We demonstrate that depth of reasoning is pervasively inconsistent both within and between classes of games, and show that this cannot easily be explained by factors such as subject confusion, changing beliefs about others’ depth of reasoning, stochastic choice, model misspecification, changing incentives, or low cognitive ability. We develop a simple model incorporating ambiguity aversion that predicts inconsistent depth of reasoning due to hedging.

Crowdinvesting can suffer from adverse selection, leaving high-quality projects unfunded. We show that refund bonuses, which provide investors a payment if a fundraising campaign is unsuccessful, can signal project quality and help overcome the market failure in crowdinvesting. Because strong projects have a lower risk of bonus payout, entrepreneurs with strong projects are more likely to offer bonuses. This signals high quality to investors, and due to their updated beliefs this drives investment toward such projects. An experiment provides supporting empirical evidence for the benefits of this signaling solution to the problems of adverse selection and asymmetric information in crowdinvesting.

We study the manager-agent (MA) game, a novel coordination game played between a manager and two agents. Unlike commonly studied coordination games, the MA game stresses asymmetric information (agents know the state of the world but managers don’t) and asymmetric payoffs (for all states of the world, agents have opposing preferences over outcomes). Efficient coordination requires coordinating agents’ actions and utilizing their private information. We vary how agents’ actions are chosen (managerial control versus delegation), the mode of communication (none, structured communication, or free-form chat), and the channels of communication (i.e. who can communicate with each other). Achieving coordination per se is not challenging, but, averaging across all states of the world, total surplus only surpasses the safe outcome when managerial control is combined with three-way free-form chat. Unlike weak-link games, advice from managers to agents does not increase total surplus. The combination of managerial control and free-form chat works because under these conditions agents rarely lie about their private information. Our results suggest that common findings from the experimental literature on lying are not robust to changes in the mode of communication.