Forward induction in coordination games

Abstract - Cited by 2 1 self - Add to MetaCart In numerous economic scenarios, contracting parties may not have a clear picture of all the relevant aspects. Therefore, she can only infer some missing pieces via the contract offered by other parties evaluate how reasonable the contract is. Further, a contracting party may actively gather information and collect evidence about all possible contingencies to avoid to be trapped into the contractual agreement.

In this paper, we propose a general framework to investigate these strategic interactions with unawareness, reasoning, and cognition and intend to unify the solution concepts in the contracting context with unawareness.

Several implications regarding optimal contract design, possible exploitation, and cognitive thinking are also presented. Mendes , Our empirical results point to the evidence of the existence of integrated behaviour among several of those stock market indexes of different dimensions. Our main experimental results are that in a coordination task with a cognitive component 1 players play differently when playing against themselves rather than against another player, and 2 given the opportunity, players signal cognition by choosing the coordination task over an outside option, a phenomenon which we refer to as cognitive forward induction.

Documents: Advanced Search Include Citations. Download Download PDF. Translate PDF. Ross University of British Columbia, Vancouver, BC, Canada Received 19 June Accepted 17 August This paper provides experimental evidence on the power of forward induction arguments in a 2x2 coordination game. Allowing one player the option of obtaining a certain payoff instead of playing the game coordinates play in the direction predicted by the forward induction argument. However, two-way pre-play communication is a more effective coordination device.

Motivation Recent theoretical work has highlighted the importance of coordination games and the potential problem of coordination failures in numerous economic environments. Examples include the work on network externalities [e. Katz and Shapiro 1, product warranties with bilateral moral hazard [Cooper and Ross ] and team production [Bryant ]. Coordination failures have also been the focus of much recent work on macroeconomic models of imperfectly competitive economies [e.

Heller and Cooper and John and search [Diamond l. There is now a growing body of experimental work which documents that coordination failures do occur [e. An example of a coordination game, game CG, is given in fig. Game CG has the important property of a coordination game: multiple, Pareto-rankable, pure strategy Nash equilibria, at outcomes associated with strategies 1,l and 2,2. Game CG. While players have something to lose by being in the Pareto inferior equilibrium, even this equilibrium weakly dominates the two disequilibrium outcomes.

Thus, coordination means two things: finding the best from the set of equilibria, and avoiding costly ex post disequilibrium outcomes. Coordination problems may be resolved if the histories players bring to a particular subgame can affect the beliefs their rivals hold about their intended actions. This involves the application of forward induction and can be applied if game CG is modified in a particular way l. In particular, suppose row was permitted to choose to play CG or receive Since row should only reject the outside option if he expects to earn more playing the game, the logic of forward induction requires that column should be certain that row will not choose strategy 1 since that cannot lead to a payoff higher then Therefore, since row must be planning on playing strategy 2, column should best-respond with her strategy 2 and the payoffs lOOO,lOOO follow.

Outside options paying less than , however, should be irrelevant while options paying more than should never be rejected. We test the effects of a outside option with a treatment labeled CG However, we also found that this improvement was due, at least in part, to the fact that the outside option created a focal point.

In this paper, we ask whether similar focal point effects will be observed in coordination games. Since there are fundamental differences in the coordination problems inherent in the two types of games, it seems possible that this focal point effect will not arise in game CG.

While both players in BOS want to avoid ex post disequilibrium, they disagree about preferred outcomes. This adds an element of conflict which may be resolved by adding an asymmetry e. In coordination games, the conflict is absent; instead, players need confidence that their rival will play the strategy that supports the Pareto-dominant Nash equilib- rium.

Anyone you share the following link with will be able to read this content:. Sorry, a shareable link is not currently available for this article. Provided by the Springer Nature SharedIt content-sharing initiative. Skip to main content. Search SpringerLink Search. Abstract We provide eductive foundations for the concept of forward induction, in the class of games with an outside option.

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