The Role of Subsidies in Coordination Games with Interconnected Risk

Bibliographic Data

ID12165758
AuthorsMin Gong (0000-0002-5159-6153, Altisource Winston‐Salem NC USA, corresponding author), Geoffrey Heal (0000-0002-2837-0025, Columbia Business School Columbia University New York NY USA), David H Krantz (Center for Research on Environmental Decisions Columbia University New York NY USA), David Krantz (0000-0001-6062-6628, Columbia University), Howard Kunreuther (Wharton School University of Pennsylvania Philadelphia PA USA), Elke U Weber (0000-0002-1678-3631, Center for Research on Environmental Decisions Columbia University New York NY USA)
Year2014
Volume27
Issue5
Pages395-407
Publication date2014-02-17
Peer ReviewedYes
Open AccessYes
TypeARTICLE
VenueJournal of Behavioral Decision Making (JOURNAL)
Journal identifiersISSN: 0894-3257 • E-ISSN: 1099-0771
PublisherWiley (PUBLISHER • GB)
DOI10.1002/bdm.1816
OpenAlexW1543170887
LanguageEN
References cited35

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. Copyright © 2014 John Wiley & Sons, Ltd

Business · Coordination game · Economics · Microeconomics · Operations management · Pareto principle · Status quo · Subsidy · Welfare · Decision-Making and Behavioral Economics · Economic and Environmental Valuation · Experimental Behavioral Economics Studies

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