The role of subsidies in coordination games with interconnected risk
Can subsidies promote Pareto-optimum coordination? We found that partially subsidizing the cooperative actions for two out of six players in a laboratory coordination game usually produced better coordination and higher total social welfare with both deterministic and stochastic payoffs. Not only were the subsidized players more likely to cooperate (choose the Pareto-optimum action), but the unsubsidized players increased their expectations on how likely others would cooperate, and they cooperated more frequently themselves. After removal of the subsidy, high levels of coordination continued in most groups with stochastic payoffs but declined in deterministic ones. This carry-over disparity between the deterministic and stochastic settings was consistent with the economic theories that agents were more likely to keep the status quo option under uncertainty than without uncertainty. Hence, players with stochastic payoffs were more likely to keep the high coordination level (status quo) brought by the subsidy in the previous subsidy session. A post-game survey also indicated that with stochastic payoffs, players focused on risk reduction. Temporary subsidies promoted lasting coordination because even after subsidy was removed, players still assumed that others players would prefer reduced risks from cooperation. With deterministic payoffs, however, the subsidy might crowd out other rationales for coordination, with many players indicating that the subsidy was the only reason for anyone to cooperate. Hence, the coordination level dropped when the subsidy was removed.
Gong, Min, Geoffrey Heal, David Krantz, Howard Kunreuther, and Elke Weber. "The role of subsidies in coordination games with interconnected risk." Journal of Behavioral Decision Making 27, no. 5 (December 2014): 395-407.
Each author name for a Columbia Business School faculty member is linked to a faculty research page, which lists additional publications by that faculty member.
Each topic is linked to an index of publications on that topic.