OVERCOMING COORDINATION FAILURE THROUGH NEIGHBORHOOD CHOICE~AN EXPERIMENTAL STUDY~

Maastricht UniversityArno Riedl Ingrid M.T. Rohde Martin Strobel

Introduction: Why ? Laboratory: people fail to coordinate on surplus

maximizing equilibria Reality: people able to agree on rather efficient

arrangements

∆ ?Largely neglected in the experimental and theoretical economic literature Our hypothesis Endogenous choice of interaction partners is a

powerful force to achieve coordination on the payoff dominant equilibrium

Interaction structurePossibility to choose interaction partners

Coordination game

Representation during experimentyour colour colour of your your earnings

earnings of your neighbour neighbour blue blue 95 points 95 points blue green 5 points 90 points green blue 90 points 5 points green green 75 points 75 points

B GB 95,95 5,90

G 90,5 75,75

Payoff dominant equilibrium

Risk dominant equilibrium

Experiment: Repeated Network Game

simultaneously

group size = 6 players two time blocks of 30 periods full information

Decisions player i:I. Network formation # neighbors

Two parameters:1. One-sided vs. two-sided link formation2. Costless vs. costly link formationII. Coordination game: 1 strategy

Implications Network Game Link formation

6 players Total possible # links

proposed: 30 links Total possible # links

formed: 15 links

Coordination gameB G

B 95,95 5,90

G 90,5 75,75

Blue very risky complete network need all 5 other players to play B

in order for you to play B as well

Experiment: Treatments Experimental treatments

Cost forming link = 80 points Control treatment : exogenously fixed complete

network search “stable” equilibrium strategy & network

structure

Link formation

one-sided

two-sided

Linking costcostless I II

costly III

Repeated network game: our predictions

Punishment: efficiency enforcers

trade off rd versus pd action no threat punishmenthunt

complete network

risk dominance

One-sided, costless

One sided, costly

Two-sided, costless

Control treatment

Additional coordination problem

no threat punishment

small & unstable networks

complete network

payoff dominance

risk dominance

Actual Experiment Computerized experimental sessions at BEE laboratory

Maastricht

210 subjects: Students Maastricht UniversityEach treatment : 3 sessions

1 session == 18 subjects 9 independent 1 group == 6 subjects observations

One sided costly: 8 observations

Each session took approximately two hours

Average earning per subject: 26.05 Euro

Results: what is actually played

.2.4

.6.8

1Frequency

0 10 20 30Round

one sided costly one sided costless two sided costless full fixed

part 1Frequency payoff dominant play

Round 1No significant ∆ among the four treatments in payoff dominant play

Overall (1)Significant ∆ treatments with endogenous network structure vs. control treatment

Overall (2)Increase played payoff dominant eq played with endogenous network structure, decrease in control treatment

payoff dominant equilibrium / total play

Network: link structure.4

.6.8

1Fr

eque

ncy

0 10 20 30Round

one sided costly one sided costless two sided costless full fixed

Part INetwork density

0.1

.2.3

.4.5

Freq

uenc

y

0 10 20 30Round

one sided costly one sided costless two sided costless

Part IExcess links

Overall:One sided costless: complete network

Two sided costless: punishmentOne sided costly: additional coordination

problem

Overall:One sided costless: all links proposedTwo sided costless: no full reciprocation

efficiency enforcersOne sided costly: add.coordination

problem not solved

0.2

.4.6

.81

ff 2snoc 1snoc 1sc

frpdpd frprfrrdrd frnoplay

Results: play0

.2.4

.6.8

1

ff 2snoc 1snoc 1sc

frpdpd frprfrrdrd

Overall:Two sided costless:CG not always playedOne sided costly: CG not always played

Overall:Endogenous treatments: surplus max. eq.Costly highest coordination surplus max. eq.

Overall:One sided costly: coordination problemTwo sided costless: much eq. play

less off eq. play

0.2

.4.6

.81

ff 2snoc 1snoc 1sc

frpdpd frprfrrdrd

Actual # Play / 15Actual play/ total actual play Total play/ possible play

Further tests: Why these results?

Network structure vs action choice

Action choice history vs. link proposal

Individual data on: risk preferences: ten paired lottery (Holt Laurey,

2002) Generalized preferences on equality & efficiency personality traits: Brandstaetter 32 questions

ConclusionOur hypothesis

Endogenous choice of interaction partners is a powerful force to achieve coordination on the payoff dominant

equilibrium

strong support for our hypothesis!

?or