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 National Science
Foundation Award #0550963 |
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Equilibrium Selection in Entry Games: An Experimental Study |
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| Investigator(s): |
John Duffy (PI)
; Jack Ochs (Co-PI)
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| Sponsor: |
University of Pittsburgh, PA 15260 4126247400
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| Start Date/Expiration Date |
2006-03-01 to 2007-02-28 (amended 2006-02-24) |
| Awarded Amount to Date: |
$63,203 |
| Abstract: This study examines equilibrium selection concepts in static and dynamic entry games using controlled laboratory experiments with paid human subjects. In an entry game, each member of a group of players makes a binary decision: "enter" or "don't enter." The payoff to entry depends on the number of players who choose to enter and on a state variable Y, while the payoff to non-entry is invariant to entry decisions by others or the state variable. The study explores behavior in entry games of complete information, where the value of the state Y is known to all players in advance of making their action choices. Such games give rise to multiple equilibria and coordination problems. A particular focus of this study is to assess the predictive power of two different equilibrium selection principles.
Static entry games are used to test the theory of global games as an equilibrium selection device. This theory posits that players play games of complete information as if they were playing a related global game of incomplete information. The global game consists of the set of all games, G, with the same form as the game of interest. The strategy for playing a global game involves a threshold value for the state variable Y; players choose to enter if Y turns out to be greater than or equal to their threshold value and choose not to enter otherwise. Unlike the original game of complete information with its multiplicity of equilibria, the global game of incomplete information has a unique perfect Bayesian equilibrium. Therefore, if all players play the game of complete information as though there were a common understanding that all players will play that game as if they were playing the related global game, the coordination problem is resolved.
In dynamic entry games, individuals decide not only whether to enter but also when to enter. Once entry occurs it is irreversible. The number of people who have already entered is part of the state description, and individuals can condition their decisions on that information. The dynamic entry game ends after n periods, or when every player has chosen to enter, whichever comes first. In this setting, subgame-perfection is the relevant equilibrium selection device. If the state variable, Y, does not indicate that entry is dominated, the subgame-perfect equilibrium prediction calls for all players immediately to choose to enter, thereby resolving the coordination problem. This entry threshold in the dynamic game will generically differ from the global game threshold in static versions of the same entry game.
Do either of these equilibrium selection principles actually predict how groups of individuals behave in the face of strategic uncertainty created by a multiplicity of equilibria? One of the innovations of this project is that it seeks to address this question by examining the behavior of paid subjects in a controlled laboratory environment. Within-subject experimental design enables the assessment of the extent to which players in static, complete information entry games with multiple equilibria behave as though they were playing a related global game. Dynamic game treatment not only serves as a test of the subgame-perfect equilibrium notion; more importantly, it enables the assessment of whether and how the degree of coordination achieved under the dynamic structure differs from that achieved in static versions of the same game.
As for broader impacts, the experimental design replicates, builds on and adds to prior experimental research on these important questions and is simple enough that other researchers should be able to replicate and extend the findings. While the design uses an entry game that characterizes some important aspects of financial markets, an understanding of how people behave in situations where there are a multiplicity of equilibria is of great importance in other areas as well, such as contract and mechanism design, the origin of standards and conventions and the possibility of self-fulfilling prophecies. |
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| NSF Org: |
SES - Division of Social and Economic Sciences |
| Award Number: |
0550963 |
| Award Instrument: |
Continuing grant |
| Program Manager: |
Kaye Husbands Fealing
SES Division of Social and Economic Sciences
SBE Directorate for Social, Behavioral & Economic Sciences
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| NSF Program(s): |
DECISION RISK & MANAGEMENT SCI, ECONOMICS |
| Field Application(s): |
Human Subjects |
| Program Reference Code(s): |
UNASSIGNED, 0000 |
| Program Element Code(s): |
1321
ECONOMICS, 1320 |
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