Abstract:
Motivated by the fact that people’s perceptions of their societies are routinely incorrect, we study the possibility and implications of misperception in social interactions. We focus on coordination games with assortative interactions, where agents with higher types (e.g., wealth, political attitudes) are more likely than lower types to interact with other high types. Assortativity creates scope for misperception, because what players observe in their local interactions need not be representative of society as a whole. To model this, we define a tractable solution concept, “local perception equilibrium” (LPE), that describes possible behavior and perceptions when players’ beliefs are derived only from their local observations. We show that there is a unique form of misperception that can persist in any environment: This is assortativity neglect, where all agents believe the people they interact with to be a representative sample of society as a whole. Relative to the case with correct perceptions, assortativity neglect generates two mutually reinforcing departures: A “false consensus effect,” whereby agents’ perceptions of average characteristics in the population are increasing in their own type; and more “dispersed” behavior in society, which adversely affects welfare due to increased miscoordination. Finally, we propose a comparative notion of when one society is more assortative than another and show that more assortative societies are characterized precisely by greater action dispersion and a more severe false consensus effect, and as a result, greater assortativity has an ambiguous effect on welfare.