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The Compromise Game: Two-Sided Adverse Selection in the Laboratory

The Compromise Game: Two-Sided Adverse Selection in the Laboratory Abstract We analyze a game of two-sided private information where players have privately known “strengths” and can decide to fight or compromise. If either chooses to fight, the stronger player receives a high payoff and the weaker player receives a low payoff. If both choose to compromise, each player receives an intermediate payoff. The only equilibrium is for players to always fight. In our experiment, we observe frequent compromise, more fighting the lower the compromise payoff and less fighting by first than second movers. We explore several theories of cognitive limitations in an attempt to understand these anomalous findings. (JEL C91 , D82 ) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Microeconomics American Economic Association

The Compromise Game: Two-Sided Adverse Selection in the Laboratory

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Publisher
American Economic Association
Copyright
Copyright © 2009 by the American Economic Association
Subject
Articles
ISSN
1945-7685
eISSN
1945-7685
DOI
10.1257/mic.1.1.151
Publisher site
See Article on Publisher Site

Abstract

Abstract We analyze a game of two-sided private information where players have privately known “strengths” and can decide to fight or compromise. If either chooses to fight, the stronger player receives a high payoff and the weaker player receives a low payoff. If both choose to compromise, each player receives an intermediate payoff. The only equilibrium is for players to always fight. In our experiment, we observe frequent compromise, more fighting the lower the compromise payoff and less fighting by first than second movers. We explore several theories of cognitive limitations in an attempt to understand these anomalous findings. (JEL C91 , D82 )

Journal

American Economic Journal: MicroeconomicsAmerican Economic Association

Published: Feb 1, 2009

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