Hostname: page-component-669899f699-ggqkh Total loading time: 0 Render date: 2025-05-05T05:39:41.568Z Has data issue: false hasContentIssue false
  • English
  • Français

Equilibrium selection through incomplete information in coordination games: an experimental study

Published online by Cambridge University Press:  14 March 2025

Antonio Cabrales ,
Rosemarie Nagel  and
Roc Armenter
Antonio Cabrales*
Affiliation:
Universidad Carlos III de Madrid, Madrid, Spain
Rosemarie Nagel*
Affiliation:
Universitat Pompeu Fabra, Barcelona, Spain
Roc Armenter*
Affiliation:
Federal Reserve Bank of New York, New York, USA
*
e-mail: [email protected]
e-mail: [email protected]
e-mail: [email protected]
Get access Rights & Permissions [Opens in a new window]

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 (inspired by the “global” games of Carlsson and van Damme, Econometrica, 61, 989-1018, 1993) 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. In the baseline game, the behavior of the subjects converges to the theoretical prediction after enough experience has been gained. The data (and the comments) suggest that this behavior can be explained by learning. To test this hypothesis, we use a different game with incomplete information, related to a complete information game where learning and prior experiments suggest a different behavior. Indeed, in the second treatment, the behavior did not converge to equilibrium within 50 periods in some of the sessions. We also run both games under complete information. The results are sufficiently similar between complete and incomplete information to suggest that risk-dominance is also an important part of the explanation.

Keywords

Global gamesRisk dominanceEquilibrium selectionCommon knowledge

JEL classification

G10: General G21: Banks • Depository Institutions • Micro Finance Institutions • Mortgages C91: Laboratory, Individual Behavior C92: Laboratory, Group Behavior C72: Noncooperative Games D82: Asymmetric and Private Information • Mechanism Design
Type
Research Article
Information
Experimental Economics , Volume 10 , Issue 3: Special issue of Experimental Economics in honor of Raymond C. Battalio: Coordination Games , September 2007 , pp. 221 - 234
Copyright
Copyright © 2007 Economic Science Association

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

References

Battalio, R., Samuelson, L., & Van Huyck, J. (2001). Optimization incentives and coordination failure in laboratory stag-hunt games. Econometrica, 69, 749–764.CrossRefGoogle Scholar
Binmore, K. (1992). Fun and games: a text on game theory. Lexington: Heath.Google Scholar
Brunnermeier, M. K., & Morgan, J. (2004). Clock games: theory and experiments (Mimeo).Google Scholar
Bryant, J. (1983). A simple rational-expectations Keynes-type model. Quarterly Journal of Economics, 98, 525–529.CrossRefGoogle Scholar
Burdzy, K., Frankel, D. M., & Pauzner, A. (2001). Fast equilibrium selection by rational players living in a changing world. Econometrica, 69, 163–189.CrossRefGoogle Scholar
Camerer, C. F., & Chong, J. C. (2002). Functional EWA: a one-parameter theory of learning in games (Mimeo).Google Scholar
Camerer, C. F., & Ho, T. H. (1999). Experience-weighted attraction learning in games: aunifying approach. Econometrica, 67, 827–874.CrossRefGoogle Scholar
Carlsson, H., & van Damme, E. E. (1993). Global games and equilibrium selection. Econometrica, 61, 989–1018.CrossRefGoogle Scholar
Charness, G., & Levin, D. (2005). When optimal choices feel wrong: a laboratory study of Bayesian updating, complexity, and affect. American Economic Review, 95, 1300–1309.CrossRefGoogle Scholar
Cheung, Y G., & Friedman, D. (2005). Speculative attacks: a laboratory study in continuous time (Working paper 606). Dept. of Economics, University of California, Santa Cruz.Google Scholar
Cooper, R., & John, A. (1988). Coordinating coordination failures in Keynesian models. Quarterly Journal of Economics, 103, 441–463.CrossRefGoogle Scholar
Cornand, C. (2006). Speculative attacks and informational structure: a experimental study. Review of International Economics, 14, 797–817.CrossRefGoogle Scholar
Costa-Gomes, M., & Crawford, V. P. (2002). Cognition and behavior in two-person guessing games: an experimental study. Manuscript in preparation, University of California, San Diego, and University of York.Google Scholar
Costa-Gomes, M., Crawford, V. P., & Broseta, B. (2001). Cognition and behavior in normal-form games: an experimental study. Econometrica, 69, 1193–1235.CrossRefGoogle Scholar
Costain, J. (2004). A herding perspective on global games and multiplicity (Working Paper 03-29 (08), May 2003). Department of Economics, Universidad Carlos III Madrid. Revised May 2004.Google Scholar
Costain, J., Heinemann, F., & Ockenfels, P. (2005). Multiple outcomes of speculative behavior in theory and in the laboratory. Manuscript, Department of Economics, Universidad Carlos III Madrid.Google Scholar
Diamond, P. (1982). Aggregate demand management in search equilibrium. Journal of Political Economy, 90, 881–894.CrossRefGoogle Scholar
Diamond, D. W., & Dybvig, P. H. (1983). Bank runs, deposit insurance and liquidity. Journal of Political Economy, 91, 401–419.CrossRefGoogle Scholar
Frankel, D. M., & Pauzner, A. (2000). Resolving indeterminacy in dynamic settings: the role of shocks. Quarterly Journal of Economics, 115, 285–304.CrossRefGoogle Scholar
Goldstein, I. (1999). Interdependent banking and currency crises in a model of self-fulfilling beliefs (Mimeo). Tel-Aviv University.Google Scholar
Goldstein, I., & Pauzner, A. (1999). Endogenous probability of bank runs in a rational expectations model (Mimeo). Tel-Aviv University.Google Scholar
Harsanyi, J. C., et al. (1988). A general theory of equilibrium selection in games. Cambridge: MIT Press.Google Scholar
Hart, O. (1982). A model of imperfect competition with Keynesian features. Quarterly Journal of Economics, 97, 109–138.CrossRefGoogle Scholar
Heinemann, F. (2000). Unique equilibrium in a model of self-fulfilling speculative attacks: comment. American Economic Review, 90, 316–318.CrossRefGoogle Scholar
Heinemann, F., & Illing, G. (2002). Speculative attacks: unique sunspot equilibrium and transparency. Journal of International Economics, 58, 429–450.CrossRefGoogle Scholar
Heinemann, F., Nagel, R., & Ockenfels, P. (2004). The theory of global games on test: experimental analysis of coordination games with public and private information. Econometrica, 72(5), 1583–1599.CrossRefGoogle Scholar
Heinemann, F., Nagel, R., & Ockenfels, P. (2007). Measuring strategic uncertainty in coordination games (Working paper). Universitat Pompeu Fabra.Google Scholar
Kajii, A., & Morris, S. (1997). The robustness of equilibria to incomplete information. Econometrica, 65, 1283–1310.CrossRefGoogle Scholar
Morris, S., & Shin, H. S. (1998). Unique equilibrium in a model of self-fulfilling currency attacks. American Economic Review, 88, 587–597.Google Scholar
Morris, S., Postlewaite, A., & Shin, H. S. (1995a). Depth of knowledge and the effect of higher order uncertainty. Economic Theory, 6, 453–467.CrossRefGoogle Scholar
Morris, S., Rob, R., & Shin, H. S. (1995b). p-dominance and belief potential. Econometrica, 63, 145–157.CrossRefGoogle Scholar
Myerson, R. B. (1991). Game theory: analysis of conflict. Cambridge: Harvard University Press.Google Scholar
Nagel, R. (1995). Unraveling in guessing games: an experimental study. American Economic Review, 85, 1313–1326.Google Scholar
Obstfeld, M. (1996). Models of currency crisis with self-fulfilling features. European Economic Review, 40, 1037–1047.CrossRefGoogle Scholar
Rubinstein, A. (1989). The electronic mail game: strategic behavior under ‘almost common knowledge’. American Economic Review, 79, 385–391.Google Scholar
Sefton, M., & Yavaş, A. (1996). Abreu-Matsushima mechanisms: experimental evidence. Games and Economic Behavior, 16, 280–302.CrossRefGoogle Scholar
Selten, R., Sadrieh, A., & Abbink, K. (1999). Money does not induce risk neutral behavior, but binary lotteries do even worse. Theory and Decision, 46, 211–249.CrossRefGoogle Scholar
Shin, H. S. (1996). Comparing the robustness of trading systems to higher-order uncertainty. Review of Economic Studies, 63, 39–59.CrossRefGoogle Scholar
Sonsino, D., Erev, I., & Gilat, S. (1999). On rationality, learning and zero-sum betting—an experimental study of the no-betting conjecture (Mimeo). Technion University.Google Scholar
Søvik, Y. (2000). Strength of dominance and depths of reasoning (Mimeo). University of Oslo.Google Scholar
Stahl, D. O., & Wilson, P. W. (1995). On players’ models of other players: theory and experimental evidence. Games and Economic Behavior, 10, 218–254.CrossRefGoogle Scholar