How Large Looms the Ghost of the Past? State-Dependence Vs. Heterogeneity in Coordination Games

17 Pages Posted: 30 Nov 2009

See all articles by Omar Al-Ubaydli

Omar Al-Ubaydli

George Mason University - Department of Economics; Derasat; George Mason University - Mercatus Center

Date Written: July 2009

Abstract

In games with multiple, Pareto-rankable equilibria and repeated play, does a history of playing an inefficient equilibrium make it harder for the players to reach the efficient equilibrium? In other words, can people 'get stuck' in bad equilibria? Previous studies have found support for this, but they have relied on naturally occurring variation in precedent. I implement randomized control to establish that precedent effects are important, but that natural occurring variation exaggerates the importance of precedent. I present evidence that some of the endogeneity of naturally occurring precedents is due to variation in risk-attitudes. This is because in the coordination games used, the inefficient equilibrium is associated with a safe strategy.

Understanding the casual effect of precedent is important since many development problems, such as institutional change and technological advancement, are viewed as coordination games with Pareto-rankable equilibria. Moreover an appreciation of how potential heterogeneity may interact with the policy is essential when trying to lift groups out of bad precdents.

Keywords: Coordination, precedent, risk attitudes, state dependence

JEL Classification: D02, D8, 043

Suggested Citation

Al-Ubaydli, Omar, How Large Looms the Ghost of the Past? State-Dependence Vs. Heterogeneity in Coordination Games (July 2009). GMU Working Paper in Economics No. 09-05, Available at SSRN: https://ssrn.com/abstract=1515859 or http://dx.doi.org/10.2139/ssrn.1515859

Omar Al-Ubaydli (Contact Author)

George Mason University - Department of Economics ( email )

4400 University Drive
Fairfax, VA 22030
United States
703-993-4538 (Phone)
703-993-1133 (Fax)

Derasat ( email )

Bahrain

George Mason University - Mercatus Center ( email )

3434 Washington Blvd., 4th Floor
Arlington, VA 22201
United States

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