BID Brown Bag Seminar: Payoff inequity reduces the effectiveness of correlated-equilibrium recommendations

Research Cluster

Speaker:Nicholas Feltovich, Monash University
Date: Tuesday 10 January 2017
Time: 12.30 - 13.30
Location: Bateman Lecture Theatre, Building One

Further details

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 that would lead to a very unfavourable payoff distribution, as long as the cost of doing so is not too large. We derive comparative-static predictions across games based on a theoretical 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 either payoff asymmetry increases or the cost of disobeying an unfavourable recommendation decreases, subjects are more likely to disobey recommendations, resulting in lower levels of coordination and payoff efficiency but also more equitable payoffs.