Paper #1849

Title:

Coordination and sophistication

Authors:

Larbi Alaoui, Katharina A. Janezic and Antonio Penta

Date:

November 2022

Abstract:

How coordination can be achieved in isolated, one-shot interactions without communication and in the absence of focal points is a long-standing question in game theory. We show that a cost-benefit approach to reasoning in strategic settings delivers sharp theoretical predictions that address this central question. In particular, our model predicts that, for a large class of individual reasoning processes, coordination in some canonical games is more likely to arise when players perceive heterogeneity in their cognitive abilities, rather than homogeneity. In addition, and perhaps contrary to common perception, it is not necessarily the case that being of higher cognitive sophistication is beneficial to the agent: in some coordination games, the opposite is true. We show that subjects' behavior in a laboratory experiment is consistent with the predictions of this model, and reject alternative coordination mechanisms. Overall, the empirical results strongly support our model.

Keywords:

Coordination, cognitive cost, sophistication, strategic reasoning, value of reasoning

JEL codes:

C72, C91, C92, D80

Area of Research:

Microeconomics

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