Global Games with Strategic Substitutes: An Experimental Investigation

Abstract

We experimentally investigate the theory of global games in a simultaneous three-agent market entry game with strategic substitutes. The payoff from staying out is constant, whereas the payoff from entering depends on a random state, a heterogeneous cost of entry, and decreases in the number of entrants. The game predicts multiple Nash equilibria for intermediate state values. The (global) game, however, where agents observe a noisy but precise private signal about the state has a unique equilibrium where agents adopt threshold strategies that are ordered by the entry cost. This equilibrium persists in the limit and characterizes the unique equilibrium that is selected in the game without noise. The experiment provides support for the theory. Aggregate and individual behavior follow comparative static predictions. A majority of subjects adopt threshold strategies with few mistakes. Finally, a majority of outcomes in the game without noise correspond to the equilibrium selected by the theory

Mir Adnan Mahmood

Economist, Bates White Economic Consulting

I am an Economist at Bates White Economic Consulting. I received my PhD in Economics from The Ohio State University.