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The effect of hysteresis on equilibrium selection in coordination games

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  • Romero, Julian

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 served as a simplified model to better understand this problem. This paper first presents theoretical results that give conditions under which the minimum-effort coordination game exhibits hysteresis. It then uses these theoretical results to develop and confirm some experimental hypotheses 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 that when cost c=0.5 in the minimum-effort coordination game, there is significantly 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.

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  • Romero, Julian, 2015. "The effect of hysteresis on equilibrium selection in coordination games," Journal of Economic Behavior & Organization, Elsevier, vol. 111(C), pages 88-105.
    • Handle: RePEc:eee:jeborg:v:111:y:2015:i:c:p:88-105
    DOI: 10.1016/j.jebo.2014.12.029
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    More about this item

    Keywords

    Hysteresis; Minimum-effort coordination game; Logit equilibrium; Experimental economics; Equilibrium selection;
    All these keywords.

    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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