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

  • Juan D. Carrillo
  • Thomas R. Palfrey
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    We analyze a game of two-sided private information where players have privately known "strengths" and can decide to fight or compromise. If either chooses to fight, the stronger player receives a high payoff and the weaker player receives a low payoff. If both choose to compromise, each player receives an intermediate payoff. The only equilibrium is for players to always fight. In our experiment, we observe frequent compromise, more fighting the lower the compromise payoff and less fighting by first than second movers. We explore several theories of cognitive limitations in an attempt to understand these anomalous findings. (JEL C91, D82)

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    Article provided by American Economic Association in its journal American Economic Journal: Microeconomics.

    Volume (Year): 1 (2009)
    Issue (Month): 1 (February)
    Pages: 151-81

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    Handle: RePEc:aea:aejmic:v:1:y:2009:i:1:p:151-81
    Note: DOI: 10.1257/mic.1.1.151
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    1. Vincent P. Crawford & Nagore Iriberri, 2007. "Level-k Auctions: Can a Nonequilibrium Model of Strategic Thinking Explain the Winner's Curse and Overbidding in Private-Value Auctions?," Econometrica, Econometric Society, vol. 75(6), pages 1721-1770, November.
    2. Philippe Jeniel, 2001. "Analogy-Based Expectation Equilibrium," Economics Working Papers 0003, Institute for Advanced Study, School of Social Science.
    3. Miguel Costa-Gomes & Vincent P. Crawford, 2004. "Cognition And Behavior In Two-Person Guessing Games: An Experimental Study," Levine's Bibliography 122247000000000143, UCLA Department of Economics.
    4. Goeree, Jacob K. & Holt, Charles A. & Palfrey, Thomas R., 2004. "Regular quantal response equilibrium," Working Papers 1203, California Institute of Technology, Division of the Humanities and Social Sciences.
    5. Nagel, Rosemarie, 1995. "Unraveling in Guessing Games: An Experimental Study," American Economic Review, American Economic Association, vol. 85(5), pages 1313-26, December.
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