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Coordination with third-party externalities

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  • Bland, James
  • Nikiforakis, Nikos

Abstract

When agents face coordination problems their choices often impose externalities on third parties. If an agent cares about them or believes others do, they can affect equilibrium selection. We present evidence from lab experiments showing that changes in the size and the sign of third-party externalities have a significant impact on tacit coordination. Decision makers are more willing to incur a cost to try to avoid imposing a large negative externality on a third party, than they are to avoid a small negative externality or to generate a large positive externality. However, when decision-makers' incentives are at odds with the interests of third parties, many of them appear to ignore third-party externalities even if they are large in magnitude, and ignoring them implies substantial earning inequalities and reductions in group earnings. Individuals revealed to be other-regarding in a non-strategic allocation task often behave as-if selfish when trying to coordinate. We discuss explanations for our findings.

Suggested Citation

  • Bland, James & Nikiforakis, Nikos, 2015. "Coordination with third-party externalities," European Economic Review, Elsevier, vol. 80(C), pages 1-15.
  • Handle: RePEc:eee:eecrev:v:80:y:2015:i:c:p:1-15
    DOI: 10.1016/j.euroecorev.2015.07.019
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    References listed on IDEAS

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    Cited by:

    1. Strobel, Christina & Kirchkamp, Oliver, 2017. "Sharing responsibility with a machine," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168106, Verein für Socialpolitik / German Economic Association.
    2. repec:kap:expeco:v:21:y:2018:i:1:d:10.1007_s10683-017-9523-6 is not listed on IDEAS

    More about this item

    Keywords

    Tacit coordination; Social preferences; Externalities; Equilibrium selection; Social welfare;

    JEL classification:

    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement

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