Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2020:17: Discontinuous and Continuous Stochastic Choice and Coordination in the Lab

Maxim Goryunov () and Alexandros Rigos ()
Additional contact information
Maxim Goryunov: Nazarbayev University
Alexandros Rigos: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

Abstract: Coordination games have multiple equilibria under complete information. However, recent theoretical advances show that if players are uncertain but can acquire information about a payoff-relevant state of the world, the number of equilibria depends on whether they can implement strategies (stochastic choice rules) discontinuous in the state. We experimentally test these results in a two-player investment game. Through a minimal visual variation in the design (our treatment) we prompt participants to play strategies whereby their probability to invest is either continuous or discontinuous in the payoff-relevant state. When participants use continuous strategies, average behavior is consistent with play in the risk-dominant equilibrium, the unique theoretical prediction. When they use discontinuous strategies—in¬¬ which case there are multiple equilibria—average behavior is closer to the payoff-dominant equilibrium strategy. Additionally, we extend the theory to heterogeneous populations: the set of equilibria monotonically decreases in the proportion of players who use continuous strategies.

Keywords: Coordination; Global games; Information acquisition; Continuous stochastic choice; Visual information; Experiment; Perception

JEL-codes: C72; C92; D83

59 pages, August 31, 2020

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