Does Payoff Equity Facilitate Coordination? A Test of Schelling's Conjecture

Abstract

Starting from Schelling (1960), several game theorists have conjectured that payoff equity might facilitate coordination in normal-form games with multiple equilibria -the more equitable equilibrium might be selected either because fairness makes it focal or because many individuals dislike payoff inequities, as abundant experimental evidence suggests. In this line, we propose a selection principle called Equity (EQ), which selects the equilibrium in pure strategies minimizing the difference between the highest and smallest payoff, if only one such equilibrium exists. Using a within-subjects experimental design, furthermore, we study the relative performance of the equity principle in six simple 2x2 coordination games.Overall, we find that Equity explains individual behavior better than a large range of alternative theories, including theories of bounded rationality and several other equilibrium selection principles. Further, a classification analysis suggests the existence of two main groups of players: (i) players who tend to play as Equity predicts, and (ii) a miscellaneous group of players who either go for the risk dominant equilibrium or act in a boundedly rational manner. This heterogeneity seems to be behind most of the coordination failures that we observe.Keywords: Coordination; equity; experiments; inequity aversion; level-k thinking; risk dominance.

Inequity-aversion and relative kindness intention jointly determine the expenditure of effort in project teams

“…With the consideration of relative kindness intention in heterogeneous conditions, high-capacity agents tend to expend higher levels of effort than when they are selfish or consider inequity only in terms of material payoff. Moreover, in contrast to the previous literature reporting that the impact of inequity-averse preferences on cooperation under group-based contract is negative (e.g., [ 10 ]), as well as the literature reporting that inequity-aversion promotes cooperation (e.g., [ 11 , 31 ]), we show that the effect of inequity-aversion and the consideration of relative kindness intention in project teams are beneficial for team cooperation when the agents have heterogeneous productivities and homogeneous capacities, or in team projects with high-effort marginal cost. However, they are harmful for cooperation in team projects with low-effort marginal costs.…”

“…Second, we propose a model that allows for both the relative material payoff and relative kindness intention, whereas they do not consider the relative material payoff at all. In reality, when people evaluate fairness, material payoff is one of the key factors that should not be ignored [ 8 – 11 ]. Therefore, the contribution of our model is in incorporating relative kindness intention into the notion of inequity-aversion and assuming that it affects the agents’ feelings about the inequity caused by the difference between the two material payoffs.…”

“…A major issue in the project team literature is how fairness (or inequity-aversion) impacts cooperation [ 5 – 7 ]. Theoretical and experimental studies of interactive decision behavior have advanced the proposition that fairness is critical for cooperative behavior [ 8 – 11 ]. Most of the existing literature on teamwork has proposed two factors that affect the preference for fairness: material payoffs and kindness intentions [ 12 – 13 ].…”

Dynamic Unstructured Bargaining with Private Information: Theory, Experiment, and Outcome Prediction via Machine Learning

“…While this question is still under (heated) debate, 9 it is largely accepted that people are heterogeneous with respect to how they prioritize these factors. 10 A few recent papers have investigated highly structured strategic interactions (De Bruyn and Bolton 2008, Blanco et al 2011, Jacquemet and Zylbersztejn 2014, López-Pérez et al 2015, and some have examined free-form bargaining with full information (Herreiner andPuppe 2004, Galeotti et al 2015). We extend this literature by deriving theoretical predictions, and we test empirically how humans resolve the equalityefficiency trade-off in a dynamic strategic environment with informational asymmetry.…”

Policy and state in complexity economics

“…Asymmetric payoffs usually increase intricacy and volatility, through continuing income-distribution battles, distracting agents' resources from problem-solving and common wealth creation. It appears also from experimental analyses that more even payoff structures are easier to solve for agents, thus more stable in the longer-run, and facilitate voluntary collective-good contributions (Kesternich et al 2014;Krockow et al 2015;López-Pérez et al 2015;Nishi et al 2015), in this way also increasing macroeconomic performance and perceived welfare (Acemoglu et al 2015). 24…”