Correlated Equilibria, Good and Bad: An Experimental Study

University of Aberdeen Business School Working Paper No. 2008-6

24 Pages Posted: 14 Jul 2008

See all articles by John Duffy

John Duffy

University of California, Irvine

Nick Feltovich

University of Aberdeen - Business School

Date Written: June 30, 2008

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.

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

JEL Classification: D83, C72, C73

Suggested Citation

Duffy, John and Feltovich, Nicholas J, Correlated Equilibria, Good and Bad: An Experimental Study (June 30, 2008). University of Aberdeen Business School Working Paper No. 2008-6, Available at SSRN: https://ssrn.com/abstract=1158435 or http://dx.doi.org/10.2139/ssrn.1158435

John Duffy

University of California, Irvine ( email )

Department of Economics
3151 Social Science Plaza
Irvine, CA 92697
United States
949-824-8341 (Phone)

Nicholas J Feltovich (Contact Author)

University of Aberdeen - Business School ( email )

Edward Wright Building
Dunbar Street
Aberdeen, Scotland AB24 3QY
United Kingdom