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Outsourcing with identical suppliers and shortest-first policy: a laboratory experiment

Author

Listed:
  • Flip Klijn

    () (Institute for Economic Analysis (CSIC) and Barcelona GSE, Campus UAB)

  • Marc Vorsatz

    () (Universidad Nacional de Educación a Distancia (UNED))

Abstract

Abstract We study experimentally in the laboratory two 2-player games that mimic a decentralized decision-making situation in which firms repeatedly outsource production orders to multiple identical suppliers. The first game has a unique (inefficient) equilibrium in mixed strategies, while the second game has two (efficient) equilibria in pure strategies and an infinite number of (inefficient) equilibria in mixed strategies. In both games, the optimal social costs can also be obtained via dominated strategies. We find that only in the second game subjects manage to reach an efficient outcome more often when matched in fixed pairs than when randomly rematched each round. Surprisingly, this is because subjects coordinate on dominated strategies (and not an efficient pure strategy equilibrium). We show theoretically that preferences for efficiency cannot explain our experimental results. Inequality aversion, on the other hand, cannot be rejected.

Suggested Citation

  • Flip Klijn & Marc Vorsatz, 2017. "Outsourcing with identical suppliers and shortest-first policy: a laboratory experiment," Theory and Decision, Springer, vol. 82(4), pages 597-615, April.
  • Handle: RePEc:kap:theord:v:82:y:2017:i:4:d:10.1007_s11238-016-9579-3
    DOI: 10.1007/s11238-016-9579-3
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    References listed on IDEAS

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    Keywords

    Laboratory experiment; Game theory; Outsourcing; Social costs; Shortest-first policy; Social preferences;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D71 - Microeconomics - - Analysis of Collective Decision-Making - - - Social Choice; Clubs; Committees; Associations
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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