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The Compromise Game: Two-sided Adverse Selection in the Laboratory

Carrillo, Juan D. and Palfrey, Thomas R. (2006) The Compromise Game: Two-sided Adverse Selection in the Laboratory. Social Science Working Paper, 1259. California Institute of Technology , Pasadena, CA. (Unpublished)

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We analyze a game of two-sided private information characterized by extreme adverse selection, and study a special case in the laboratory. Each player has a privately known "strength" and can decide to fight or compromise. If either chooses to fight, there is a conflict; the stronger player receives a high payoff and the weaker player receives a low payoff. If both choose to compromise, conflict is avoided and each receives an intermediate payoff. The only equilibrium in both the sequential and simultaneous versions of the game is for players to always fight, independent of their own strength. In our experiment, we observe among other things (i) frequent compromise, (ii) little evidence of learning, and (iii) different behavior between first, second and simultaneous movers. We explore several models in an attempt to understand the reasons underlying these anomalous choices, including quantal response equilibrium, cognitive hierarchy, and cursed equilibrium.

Item Type:Report or Paper (Working Paper)
Palfrey, Thomas R.0000-0003-0769-8109
Additional Information:Part of this research was conducted while the first author was visiting Caltech. The hospitality of the hosting institution is greatly appreciated. We also gratefully acknowledge the financial support of the National Science Foundation (SES-0079301, SES-0450712, SES-0094800), The Princeton Laboratory for Experimental Social Science, and The Princeton Center for Economic Policy Studies. We thank seminar audiences at Collège de France, Princeton University, Universidad Carlos III, Universitat Autonoma de Barcelona, University of Pennsylvania, the Fundación Ramon Areces Conference on Experimental and Behavioral Economics in December 2006, and 2006 ESA meeting in Tucson for comments, and Shivani Nayyar, Stephanie Wang, and Rumen Zarev for research assistance.
Group:Social Science Working Papers
Funding AgencyGrant Number
Princeton Laboratory for Experimental Social Science (PLESS)UNSPECIFIED
Princeton Center for Economic Policy StudiesUNSPECIFIED
Subject Keywords:two-sided private information, adverse selection, laboratory experiment, behavioral game theory, quantal response equilibrium, cognitive hierarchy, cursed equilibrium
Series Name:Social Science Working Paper
Issue or Number:1259
Classification Code:JEL: C92, D82
Record Number:CaltechAUTHORS:20170801-094538005
Persistent URL:
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:79669
Deposited By: Hanna Storlie
Deposited On:01 Aug 2017 20:24
Last Modified:22 Nov 2019 09:58

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