Equilibrium Selection Through Incomplete Information in Coordination Games: An Experimental Study
Universitat Pompeu Fabra Working Paper No. 601
28 Pages Posted: 7 Mar 2002
Date Written: February 15, 2002
We perform an experiment on a pure coordination game with uncertainty about the payoffs. Our game is closely related to models that have been used in many macroeconomic and financial applications to solve problems of equilibrium indeterminacy. In our experiment each subject receives a noisy signal about the true payoffs. This game has a unique strategy profile that survives the iterative deletion of strictly dominated strategies (thus a unique Nash equilibrium). The equilibrium outcome coincides, on average, with the risk-dominant equilibrium outcome of the underlying coordination game. The behavior of the subjects converges to the theoretical prediction after enough experience has been gained. The data (and the comments) suggest that subjects do not apply through "a priori" reasoning the iterated deletion of dominated strategies. Instead, they adapt to the responses of other players. Thus, the length of the learning phase clearly varies for the different signals. We also test behavior in a game without uncertainty as a benchmark case. The game with uncertainty is inspired by the "global" games of Carlsson and Van Damme (1993).
Keywords: Global games, risk dominance, equilibrium selection, incomplete information, common knowledge
JEL Classification: C72, C91, C92, D82, G10, G21
Suggested Citation: Suggested Citation