Network Structure in a Link Formation Game: An Experimental Study
Economic Inquiry, October 2014. Volume 52, Issue 4. Pages 1341-1363
Abstract: In this paper, we use an experiment to evaluate the performance of alternative refine- ments in a Myersonian link formation game with a supermodular payoff function. Our results show that a non-cooperative refinement, the global games (GG) approach, outperforms alternative coop- erative refinements (strong Nash equilibrium, coalition-proof Nash equilibrium, and pairwise stable Nash equilibrium) in explaining the observed experimental behavior in the static game of complete information with three players. The results are robust to some comparative statics and the GG approach shows a high predictive power under incomplete information. However, under repeated interaction or with a greater number of players, the GG approach loses predictive power, but so do the cooperative refinements. The results illustrate the importance of coordination failure in practice and the need to design mechanisms to reduce this effect in practical decision-making problems.
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