Equilibrium Selection Through Incomplete Information in Coordination Games: An Experimental Study

Universitat Pompeu Fabra Working Paper No. 601

28 Pages Posted: 7 Mar 2002

See all articles by Antonio Cabrales

Antonio Cabrales

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Rosemarie Nagel

Universitat Pompeu Fabra - Department of Economics

Roc Armenter

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Date Written: February 15, 2002

Abstract

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

Cabrales, Antonio and Nagel, Rosemarie and Armenter, Roc, Equilibrium Selection Through Incomplete Information in Coordination Games: An Experimental Study (February 15, 2002). Universitat Pompeu Fabra Working Paper No. 601. Available at SSRN: https://ssrn.com/abstract=302810 or http://dx.doi.org/10.2139/ssrn.302810

Antonio Cabrales (Contact Author)

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
(34-93) 542 27 65 (Phone)
(34-93) 542 17 46 (Fax)

Rosemarie Nagel

Universitat Pompeu Fabra - Department of Economics ( email )

Ramon Trias Fargas 25-27
08005 Barcelona
Spain
+34 93 542 3729 (Phone)
+34 93 542 1746 (Fax)

Roc Armenter

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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