Abstract
We study experimentally in the laboratory two 2-player games that mimic a decentralized decision-making situation in which firms repeatedly outsource production orders to multiple identical suppliers. The first game has a unique (inefficient) equilibrium in mixed strategies, while the second game has two (efficient) equilibria in pure strategies and an infinite number of (inefficient) equilibria in mixed strategies. In both games, the optimal social costs can also be obtained via dominated strategies. We find that only in the second game subjects manage to reach an efficient outcome more often when matched in fixed pairs than when randomly rematched each round. Surprisingly, this is because subjects coordinate on dominated strategies (and not an efficient pure strategy equilibrium). We show theoretically that preferences for efficiency cannot explain our experimental results. Inequality aversion, on the other hand, cannot be rejected.
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Notes
Obviously, since the outsourcing problem has a very simple structure, our study should be regarded as a first step in a full-fledged analysis. Indeed, the advantage of its simplicity is that future experimental studies can incorporate more complex real-life features and then more easily determine how these additional features affect behavior and outcomes.
In case one player owns the two shortest jobs (A and B) his only optimal decision is to send his jobs to different machines. And consequently, the other player’s optimal decision is also to send his jobs to different machines (in any of the two possible ways).
The estimated frequencies of coordination on exterior profiles are 0.0067 in game AC and 0.0084 in game AD.
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We thank a referee for useful comments and suggestions. F. Klijn gratefully acknowledges financial support from the Generalitat de Catalunya (2014-SGR-1064), the Spanish Ministry of Economy and Competitiveness through Plan Estatal de Investigación Científica y Técnica 2013–2016 (ECO2014-59302-P), and the Severo Ochoa Programme for Centres of Excellence in R&D (SEV-2015-0563). He also gratefully acknowledges financial support from the Fundación Ramón Areces. M. Vorsatz gratefully acknowledges financial support from the Fundación Ramón Areces and the Spanish Ministry of Economy and Competitiveness (ECO2012–31985 and ECO2015–65701–P).
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Klijn, F., Vorsatz, M. Outsourcing with identical suppliers and shortest-first policy: a laboratory experiment. Theory Decis 82, 597–615 (2017). https://doi.org/10.1007/s11238-016-9579-3
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DOI: https://doi.org/10.1007/s11238-016-9579-3