Cabrales, Antonio , García-Fontes, Walter , and Motta, Massimo

"Risk Dominance Selects the Leader: an Experimental Analysis"

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Abstract:  We perform an experimental analysis to test whether the risk dominance prediction is supported by the behavior of laboratory agents, in a 2 x 2 coordination game whose equilibria are not Pareto ranked. This type of game arises very often in studies of industrial organization and international trade, and we extract the parameters for the experiment from a vertical product differentiation model with two asymmetric players choosing first qualities and then prices. We show that the higher the degree of asymmeetry of the game, the higher the predictive power of the risk domiance criterion.

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