Discontinuous and continuous stochastic choice and coordination in the lab

Abstract

We experimentally test theoretical predictions on equilibrium selection in a two-player coordination (investment) game. Through a minimal visual variation, our design prompts participants to play strategies whereby investing probability is either continuous or discontinuous in the payoff-relevant state. When participants use continuous strategies, average behavior is consistent with play in the risk-dominant equilibrium, the unique theoretical prediction. When they use discontinuous strategies, average behavior is closer to the payoff-dominant equilibrium strategy. In this case, the theory predicts multiple equilibria, for which we find no support. Additionally, we extend the theory to heterogeneous populations: the set of equilibria monotonically decreases in the proportion of players who use continuous strategies.