Network Formation and Co-ordination Games

Abstract

Co-ordination games attracted many theoretically and experimentally orientated economists during the 1990s (see, for example, van Huyck et al, 1990; Cooper et al, 1992; Berninghaus and Schwalbe, 1996a; Young, 1998). In our paper we consider simple symmetric normal form 2 × 2 games which are characterized by having two equilibria in pure strategies. If such a 2 × 2 game is played in large populations with players who are randomly matched pairwise an equilibrium selection problem may arise. We know from the theoretical (for example, Boyer and Orleans, 1992) and the experimental literature (for example, Cooper et al, 1992) that in case of pure co-ordination games both symmetric equilibria may be candidates for strategy selection. In co-ordination games with two asymmetric equilibria still less is known about strategy choice in experimental games. Conventions might sometimes help to solve co-ordination problems (Lewis, 1969; Young, 1993; Berninghaus, 2003). By following conventions, players are guided to select a particular equilibria and therefore avoid co-ordination failures. In real-world societies, conventions will not arise spontaneously but rather result from a long-run evolutionary process.