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When Efficiency Requires Arbitrary Discrimination: Theoretical and Experimental Analysis of Equilibrium Selection

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  • Werner Güth

    (Max Planck Institute for Research on Collective Goods, Kurt-Schumacher-Straße 10, 53113 Bonn, Germany)

  • Hironori Otsubo

    (Faculty of Global Management, Chuo University, 742-1 Higashinakano, Hachioji 192-0393, Tokyo, Japan)

Abstract

Institutions may rely on fundamental principles, e.g., of legal philosophy, but may also have evolved according to institutional fitness, as gauged by a society’s well-being. In our stylized framework where two fundamental principles, equality and efficiency, conflict with each other, one of the three players is the third party who faces two symmetric co-players as culprits and determines whether to sanction the two culprits discriminatorily or treat them with parity. Relying on the theory of equilibrium selection, we derived equilibrium solutions and experimentally tested our behavioral hypotheses. We found that asymmetry in wealth between the two culprits let the sanctioning agent hold the richer culprit more responsible. Furthermore, our results demonstrated that when the sanctioning agent’s decision was observable, sanctioning the two culprits discriminatorily induced them to coordinate on an efficient outcome.

Suggested Citation

  • Werner Güth & Hironori Otsubo, 2023. "When Efficiency Requires Arbitrary Discrimination: Theoretical and Experimental Analysis of Equilibrium Selection," Games, MDPI, vol. 14(5), pages 1-15, September.
    • Handle: RePEc:gam:jgames:v:14:y:2023:i:5:p:65-:d:1251774
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    References listed on IDEAS

    as
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