The effect of hysteresis on equilibrium selection in coordination games

One of the fundamental problems in both economics and organization is to understand how individuals coordinate. The widely used minimum-effort coordination game has served as a simplified model to better understand this problem. This paper first presents theoretical results that give conditions under which the minimum-effort coordination game exhibits hysteresis. It then uses these theoretical results to develop and confirm some experimental hypotheses using human subjects in the laboratory. The main insight is that play in a given game is heavily dependent on the history of parameters leading up to that game. For example, the experiments show that when cost c= 0.5 in the minimum-effort coordination game, there is significantly more high effort if the cost has increased to c= 0.5 compared to when the cost has decreased to c= 0.5. One implication of this is that a temporary change in parameters may be able move the economic system from a bad equilibrium to a good equilibrium.