Professor Mehmet Y. Gurdal at the Economics Research Seminar

24/05/2016
 

The guest of our teaching and research area Prof. Mehmet Y. Gurdal holds a research presentation on "Payoff inequity reduces the effectiveness of correlated - equilibrium recommendations".

Abstract: We examine how individuals’ willingness to follow third–party recommendations in 2x2 games is affected by payoff asymmetry. We consider three versions of Battle–of–the–Sexes. Recommendations are determined by a coin flip between the two pure–strategy Nash equilibria, thus inducing a correlated equilibrium under standard (self–regarding) preferences, so that following recommendations constitutes a Nash equilibrium. However, while the payoffs implied by recommendations are equal ex ante, they are unequal ex post. So, sufficiently inequity–averse players can rationally disobey a recommendation thatwould lead to a very unfavourable payoff distribution. We derive comparative–static predictions across games based on a model combining level–k reasoning with inequity aversion, and we test these with a laboratory experiment. Our main result is qualitatively consistent
with the theoretical model: as payoff asymmetry increases, subjects are more likely to disobey recommendations,
resulting in lower levels of coordination and payoff efficiency.