The importance of higher-order beliefs to successful coordination
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Beliefs about other players’ strategies are crucial in determining outcomes for coordination games. If players are to coordinate on an efficient equilibrium, they must believe that others will coordinate with them. In many settings there is uncertainty about beliefs as well as strategies. Do people consider these “higher-order” beliefs (beliefs about beliefs) when making coordination decisions? I design a modified stag hunt experiment that allows me to identify how these higher-order beliefs and uncertainty about higher-order beliefs matter for coordination. Players prefer to invest especially when they believe that others are “optimistic” that they will invest; but knowledge that others think them unlikely to invest does not cause players to behave differently than when they do not know what their partners think about them. Thus resolving uncertainty about beliefs can result in marked efficiency gains.
KeywordsStag hunt Coordination Higher-order beliefs
Mathematical Subject ClassificationC72 C91 C92 D83
The author wishes to thank professor Lise Vesterlund for advice and support, professor Stephanie Wang for help in experimental design, seminar participants at the University of Pittsburgh, attendees at the 2012 Economic Science Association World and North American meetings, and participants at the 2015 Thurgau Experimental Economics Meeting. Support was also received from the Kiel Institute for the World Economy. Anonymous referees made several helpful suggestions towards improving the exposition of the paper.
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