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Published August 1, 2017 | Submitted
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The Compromise Game: Two-sided Adverse Selection in the Laboratory


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.

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.

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