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The Effect of Hysteresis on Equilibrium Selection in Coordination Games

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  • Julian Romero

Abstract

One of the fundamental problems in both economics and organization is to understand how individuals coordinate. The widely used minimum-effort coordination game has been used as a simplifed model to better understand this problem. This paper first presents some theoretical results that give conditions under which the minimum-effort coordination game exhibits hysteresis. Using these theoretical results, some experimental hypotheses are developed and then confirmed using human subjects in the laboratory. The main insight is that play in a given game is heavily dependent on the history of parameters leading up to that game. For example, the experiments show when cost c = 0:5 in the minimum-effort coordination game, there is signifcantly more high effort if the cost has increased to c = 0:5 compared to when the cost has decreased to c = 0:5. One implication of this is that a temporary change in parameters may be able move the economic system from a bad equilibrium to a good equilibrium.

Suggested Citation

  • Julian Romero, 2011. "The Effect of Hysteresis on Equilibrium Selection in Coordination Games," Purdue University Economics Working Papers 1265, Purdue University, Department of Economics.
  • Handle: RePEc:pur:prukra:1265
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    File URL: http://www.krannert.purdue.edu/programs/phd/Working-papers-series/2011/1265.pdf
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    References listed on IDEAS

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    1. Cason, Timothy N. & Savikhin, Anya C. & Sheremeta, Roman M., 2012. "Behavioral spillovers in coordination games," European Economic Review, Elsevier, vol. 56(2), pages 233-245.
    2. Carlsson, Hans & van Damme, Eric, 1993. "Global Games and Equilibrium Selection," Econometrica, Econometric Society, vol. 61(5), pages 989-1018, September.
    3. Roberto A. Weber, 2006. "Managing Growth to Achieve Efficient Coordination in Large Groups," American Economic Review, American Economic Association, pages 114-126.
    4. Nyberg, Sten, 1997. "The honest society: Stability and policy considerations," Journal of Public Economics, Elsevier, pages 83-99.
    5. Jordi Brandts & David J. Cooper, 2006. "A Change Would Do You Good .... An Experimental Study on How to Overcome Coordination Failure in Organizations," American Economic Review, American Economic Association, pages 669-693.
    6. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
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    Citations

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    Cited by:

    1. Aidas Masiliunas, 2016. "Inefficient Lock-in with Sophisticated and Myopic Players," Working Papers halshs-01304178, HAL.
    2. Fabra, Natalia & Montero, Juan Pablo, 2017. "Product Choice and Price Discrimination in Markets with Search Costs," CEPR Discussion Papers 12046, C.E.P.R. Discussion Papers.
    3. Aidas Masiliunas, 2016. "Inefficient Lock-in with Sophisticated and Myopic Players," Working Papers halshs-01304178, HAL.
    4. Stephen Morris & Muhamet Yildiz, 2016. "Crises: Equilibrium Shifts and Large Shocks," Working Papers 083_2016, Princeton University, Department of Economics, Econometric Research Program..
    5. Bradley J. Ruffle, Avi Weiss, Amir Etziony, 2015. "The Role of Critical Mass in Establishing a Successful Network Market: An Experimental Investigation," LCERPA Working Papers 0092, Laurier Centre for Economic Research and Policy Analysis, revised 12 May 2015.
    6. Güth, Werner & Mugera, Harriet & Musau, Andrew & Ploner, Matteo, 2014. "Deterministic versus probabilistic consequences of trust and trustworthiness: An experimental investigation," Journal of Economic Psychology, Elsevier, pages 28-40.
    7. Fabrice Le Lec & Ondrej Rydval & Astrid Matthey, 2014. "Efficiency and Punishment in a Coordination Game: Voluntary Sanctions in the Minimum Effort Game," CERGE-EI Working Papers wp526, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    8. Arifovic, Jasmina & Hua Jiang, Janet & Xu, Yiping, 2013. "Experimental evidence of bank runs as pure coordination failures," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2446-2465.

    More about this item

    Keywords

    Hysteresis; Minimum-effort Coordination Game; Logit Equilibrium; Experimental Economics; Equilibrium Selection;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • M53 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Training

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