Observing Each Other's Observations in the Electronic Mail Game

Abstract: We study a Bayesian coordination game where agents receive private information on the game's payoff structure. In addition, agents receive private signals on each other's private information. We show that once agents possess these different types of information, there exists a coordination game in the evaluation of this information. And even though the precisions of both signal types is exogenous, the precision with which agents predict each other's actions at equilibrium turns out to be endogenous. As a consequence, we find that there exist multiple equilibria if the private signals' precision is high. These equilibria differ with regard to the way that agents weight their private information to reason about each other's actions.