Laboratory experiments, such as the experiments in this project, test and enrich economic theory. This project uses laboratory experiments to examine questions of equilibrium selection in coordination games. These games are characterized by the existence of multiple equilibria which are rankable. In these games, coordination failures occur when all players are better off in one equilibrium relative to another yet may be unable to explicitly coordinate their strategies to achieve the preferred outcome. The project explores whether coordination failures arise and provides a characterization of the factors which increase the likelihood of such failures. It examines the ability of different mechanisms, e.g., communication and pre-play experience, to attenuate these failures. The project also considers an economic application of a coordination game by examining a double moral hazard problem in product markets. Economic theory suggests that coordination failure could be a major factor in macroeconomic instability and microeconomic market imperfections. This project will provide some of the first empirical evidence of the existence and significance of coordination failures in a controlled laboratory environment. This project is also methodologically important because it tests widely used game-theoretic concepts such as mechanisms for pre- play communication. Preliminary results suggest that a plausible pre-play communication mechanism fails laboratory experimental tests.
