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The compromise game: Two-sided adverse selection in the laboratory

  • Carrillo, Juan D.
  • Palfrey, Thomas R.

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 California Institute of Technology, Division of the Humanities and Social Sciences in its series Working Papers with number 1259.

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Length: 44 pages
Date of creation: Dec 2006
Date of revision:
Handle: RePEc:clt:sswopa:1259
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  15. Eddie Dekel & Michele Piccione, 2000. "Sequential Voting Procedures in Symmetric Binary Elections," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 34-55, February.
  16. Erik Eyster & Matt Rabin, 2003. "Cursed Equilibrium," Method and Hist of Econ Thought 0303002, EconWPA.
  17. Richard Mckelvey & Thomas Palfrey, 1998. "Quantal Response Equilibria for Extensive Form Games," Experimental Economics, Springer;Economic Science Association, vol. 1(1), pages 9-41, June.
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  22. Eddie Dekel & Michele Piccione, 1997. "On the Equivalence of Simultaneous and Sequential Binary Elections," Discussion Papers 1206, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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