CeDEx Brown Bag Seminar - Stephan Jagau

Title: To Catch a Stag: Identifying payoff- and risk-dominance effects in coordination games

Abstract: Five decades after Harsanyi and Selten’s seminal work on equilibrium selection, we remain unable to predict the outcomes of real-life coordination even in simple cases. One reason is that experiments have struggled to quantify the effects of payoff- and risk-dominance and to separate them from context factors like feedback, repetition, and complexity. This experiment is the first to demonstrate that both payoff- and risk-dominance significantly and independently impact coordination decision-making. Three innovations characterize the design: First, payoff- and risk-dominance are disentangled using orthogonal measures of strategic incentives and welfare externalities. Second, a no-feedback, choice-list task format minimizes deviations from one-shot incentives. Third, beliefs about others’ behavior are elicited. Surprisingly, beliefs do not only drive the effect of risk dominance but also the effect of payoff dominance. Specifically, heterogeneous beliefs of subjects conditional on behavior suggest a “social projection” or “team reasoning” mechanism underlying efficient coordination.