Talking ourselves to efficiency: Coordination in inter-generational minimum games with private, almost common and common knowledge of advice. Working paper

We use experiments to investigate the use of advice as a coordinating device in the Minimum Effort Game which is a coordination game with weak strategic complementarities and Pareto-ranked equilibria. The game is played by non-overlapping generations of players who, after they are done, pass on advice to their successors who take their place in the game. We conjectured that this inter-generational design might enable subjects to converge to the payoff-dominant outcome. We find that coordination is most likely to result when the advice is made public and also distributed in a manner that makes it common knowledge. Coordinating the actions of multiple agents is a central issue in many economic problems and the successful resolution of coordination failures is crucial to achieving optimal outcomes in such cases. For example, one of the most important problems in macroeconomics involves the issue of under-employment where the economy can be trapped in a Pareto-inferior equilibrium (Cooper, 1999). In such instances no firm wishes to expand production unless it can be assured that others will do so, yet not doing so leads to an outcome that is worse for everyone concerned. Kremer (1993) in his O-Ring theory of development proposes extensive coordination failures as the caus