Paper #222

Title:

Risk dominance selects the leader. An experimental analysis

Authors:

Antonio Cabrales, Walter Garcia Fontes and Massimo Motta

Date:

February 1997

Abstract:

Coordination games arise very often in studies of industrial organization and international trade. This type of games has multiple strict equilibria, and therefore the identification of testable predictions is very difficult. We study a vertical product differentiation model with two asymmetric players choosing first qualities and then prices. This game has two equilibria for some parameter values. However, we apply the risk dominance criterion suggested by Harsanyi and Selten and show that it always selects the equilibrium where the leader is the firm having some initial advantage. We then perform an experimental analysis to test whether the risk dominance prediction is supported by the behaviour of laboratory agents. We show that the probability that the risk dominance prediction is right depends crucially on the degree of asymmetry of the game. The stronger the asymmetries the higher the predictive power of the risk dominance criterion.

Keywords:

Risk dominance, equilibrium selection, leadership games, experimental economics, Leex

JEL codes:

C72, C92, L13

Area of Research:

Behavioral and Experimental Economics

Published in:

International Journal of Industrial Organization, 18, (2000), pp. 137-162

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