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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: antonio.cabrales@uc3m.es
e-mail: rosemarie.nagel@upf.edu
e-mail: roc.armenter@ny.frb.org
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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: GeneralG21: Banks • Depository Institutions • Micro Finance Institutions • MortgagesC91: Laboratory, Individual BehaviorC92: Laboratory, Group BehaviorC72: Noncooperative GamesD82: Asymmetric and Private Information • Mechanism Design

Information

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

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