Abstract

Can subsidies promote Pareto-optimum coordination? We found that partially subsidizing 2 out of 6 players in a laboratory coordination game usually produced better coordination and higher total payoffs both with deterministic and stochastic payoffs. After removing the subsidy, high coordination continued in most groups with stochastic payoffs, but declined for groups with deterministic ones. A post-game survey indicated that decision justifications differ between deterministic and stochastic payoff settings. Temporary subsidies seem to promote lasting coordination in risk reduction, whereas in a deterministic setting, subsidy may be counterproductive, because it crowds out other rationales for coordination.

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Citation

Heal, Geoffrey, Min Gong, Howard Kunreuther, David Krantz, and Elke Weber. "Facilitating Pareto-Optimal Coordination by Subsidies in Deterministic and Stochastic Payoff Settings." Working paper, Columbia Business School, January 15, 2011.

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