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Experimental Economics

, Volume 10, Issue 3, pp 221–234 | Cite as

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

  • Antonio Cabrales
  • Rosemarie Nagel
  • Roc Armenter
Article

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 games Risk dominance Equilibrium selection Common knowledge 

JEL

C72 C91 C92 D82 G10 G21 

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Copyright information

© Economic Science Association 2007

Authors and Affiliations

  • Antonio Cabrales
    • 1
  • Rosemarie Nagel
    • 2
  • Roc Armenter
    • 3
  1. 1.Universidad Carlos III de MadridMadridSpain
  2. 2.Universitat Pompeu FabraBarcelonaSpain
  3. 3.Federal Reserve Bank of New YorkNew YorkUSA

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