Correlated Equilibria, Good and Bad: An Experimental Study

Abstract:     
We report results from an experiment that explores the empirical validity of correlated equilibrium, an important generalization of the Nash equilibrium concept. Specifically, we seek to understand the conditions under which subjects playing the game of Chicken will condition their behavior on private, third-party recommendations drawn from known distributions. In a good-recommendations treatment, the distribution we use is a correlated equilibrium with payoffs better than any symmetric payoff in the convex hull of Nash equilibrium payoff vectors. In a bad-recommendations treatment, the distribution is a correlated equilibrium with payoffs worse than any Nash equilibrium payoff vector. In a Nash-recommendations treatment, the distribution is a convex combination of Nash equilibrium outcomes (which is also a correlated equilibrium), and in a fourth very-good-recommendations treatment, the distribution yields high payoffs, but is not a correlated equilibrium. We compare behavior in all of these treatments to the case where subjects do not receive recommendations. We find that when recommendations are not given to subjects, behavior is very close to mixed-strategy Nash equilibrium play. When recommendations are given, behavior does differ from mixed-strategy Nash equilibrium, with the nature of the differences varying according to the treatment. Our main finding is that subjects will follow third-party recommendations only if those recommendations derive from a correlated equilibrium, and further, if that correlated equilibrium is payoff-enhancing relative to the available Nash equilibria.

Number of Pages in PDF File: 24

Keywords: correlated equilibrium, recommendation, coordination problem, chicken game, hawk

JEL Classification: D83, C72, C73

working papers series