1. OVERCOMING COORDINATION FAILURE THROUGH NEIGHBORHOOD CHOICE ~AN EXPERIMENTAL STUDY~ Maastricht University Arno Riedl Ingrid M.T. Rohde Martin Strobel

2. 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 structure Possibility to choose interaction partners

3. Coordination game Representation during experiment your 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 BG B95,95 5,90 G 90,575,75 Payoff dominant equilibrium Risk dominant equilibrium

4. 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 formation 2. Costless vs. costly link formation II. Coordination game:  1 strategy

5. Implications Network Game  Link formation 6 players Total possible # links proposed: 30 links Total possible # links formed: 15 links  Coordination game BG B95,95 5,90 G 90,575,75 Blue very risky complete network  need all 5 other players to play B in order for you to play B as well

6. 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 cost costlessIII costlyIII

7. Repeated network game: our predictions Punishment: efficiency enforcers trade off rd versus pd action no threat punishment hunt complete network risk dominance One-sided, costl ess One sided, costly Two-sided, costless Control treatment Additional coordination problem no threat punishment small & unstable networks complete network payoff dominance risk dominance

8. Actual Experiment  Computerized experimental sessions at BEE laboratory Maastricht  210 subjects: Students Maastricht University Each 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

9. Results: what is actually played.2.4.6.8 1 Frequency 01020 30 Round one sided costly one sided costless two sided costless full fixed part 1 Frequency payoff dominant play Round 1 No 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

10. Network: link structure.4.6.8 1 Frequency 0102030 Round one sided costly one sided costless two sided costless full fixed Part I Network density 0.1.2.3.4.5 Frequency 0102030 Round one sided costly one sided costless two sided costless Part I Excess links Overall: One sided costless: complete network Two sided costless: punishment One sided costly: additional coordination problem Overall: One sided costless: all links proposed Two sided costless: no full reciprocation efficiency enforcers One sided costly: add.coordination problem not solved

11. 0.2.4.6.8 1 ff2snoc1snoc1sc frpdpdfrpr frrdrdfrnoplay Results: play Overall: Two sided costless:CG not always played One sided costly: CG not always played Overall: Endogenous treatments:  surplus max. eq. Costly  highest coordination surplus max. eq. Overall: One sided costly: coordination problem Two sided costless: much eq. play less off eq. play 0.2.4.6.8 1 ff2snoc1snoc1sc frpdpdfrpr frrdrd Actual # Play / 15Actual play/ total actual playTotal play/ possible play

12. 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

13. Conclusion Our hypothesis Endogenous choice of interaction partners is a powerful force to achieve coordination on the payoff dominant equilibrium  strong support for our hypothesis!

14. ? or