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The Compromise Game: Two-sided Adverse Selection in the Laboratory

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Author Info
Carrillo, Juan D
Palfrey, Thomas R
Abstract

We analyze a game of two-sided private information characterized by extreme adverse selection, and study a special case in the laboratory. Each player has a privately known "strength" and can decide to fight or compromise. If either chooses to fight, there is a conflict; the stronger player receives a high payoff and the weaker player receives a low payoff. If both choose to compromise, conflict is avoided and each receives an intermediate payoff. The only equilibrium in both the sequential and simultaneous versions of the game is for players to always fight, independent of their own strength. In our experiment, we observe among other things (i) frequent compromise, (ii) little evidence of learning, and (iii) different behaviour between first, second and simultaneous movers. We explore several models in an attempt to understand the reasons underlying these anomalous choices, including quantal response equilibrium, cognitive hierarchy, and cursed equilibrium.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6103.

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Date of creation: Feb 2007
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Handle: RePEc:cpr:ceprdp:6103

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Keywords: adverse selection; behavioural game theory; laboratory experiment;

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O24 - Economic Development, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy

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  2. Miguel A. Costa-Gomes & Vincent P. Crawford, 2006. "Cognition and Behavior in Two-Person Guessing Games: An Experimental Study," American Economic Review, American Economic Association, vol. 96(5), pages 1737-1768, December. [Downloadable!]
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  7. Casella, Alessandra & Gelman, Andrew & Palfrey, Thomas R., 2006. "An experimental study of storable votes," Games and Economic Behavior, Elsevier, vol. 57(1), pages 123-154, October. [Downloadable!] (restricted)
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  8. Robert Forsythe & R. Mark Isaac & Thomas R. Palfrey, 1989. "Theories and Tests of "Blind Bidding" in Sealed-Bid Auctions," RAND Journal of Economics, The RAND Corporation, vol. 20(2), pages 214-238, Summer. [Downloadable!] (restricted)
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  12. Richard Mckelvey & Thomas Palfrey, 1998. "Quantal Response Equilibria for Extensive Form Games," Experimental Economics, Springer, vol. 1(1), pages 9-41, June. [Downloadable!] (restricted)
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