Endogenous Selection of Aspiring and Rational Rules in Coordination Games

Abstract

The paper studies an evolutionary model where players from a given population are randomly matched in pairs each period to play a coordination game. At each instant, a player can choose to adopt one of the two possible behavior rules, called the rational rule and the aspiring rule, and then take actions prescribed by the chosen rule. The choice between the two rules depends upon their relative performance in the immediate past. We show that there are two stable long run outcomes where either the rational rule becomes extinct and all players in the population achieve full efficiency, or that both the behavior rules co-exist and there is only a partial use of efficient strategies in the population. These findings support the use of the aspiration driven behavior in several existing studies and also help us take a comparative evolutionary look at the two rules in retrospect.

Keywords: Co-evolution, Aspirations, Best-response, Random matching

JEL Classification: C72, D83