How Large Looms the Ghost of the Past? State-Dependence Vs. Heterogeneity in Coordination Games

Abstract

In games with multiple, Pareto-rankable equilibria and repeated play, does a history of playing an inefficient equilibrium make it harder for the players to reach the efficient equilibrium? In other words, can people 'get stuck' in bad equilibria? Previous studies have found support for this, but they have relied on naturally occurring variation in precedent. I implement randomized control to establish that precedent effects are important, but that natural occurring variation exaggerates the importance of precedent. I present evidence that some of the endogeneity of naturally occurring precedents is due to variation in risk-attitudes. This is because in the coordination games used, the inefficient equilibrium is associated with a safe strategy.Understanding the casual effect of precedent is important since many development problems, such as institutional change and technological advancement, are viewed as coordination games with Pareto-rankable equilibria. Moreover an appreciation of how potential heterogeneity may interact with the policy is essential when trying to lift groups out of bad precdents.