Coordination failure caused by sunspots

Abstract

In a coordination game with Pareto-ranked equilibria, we study whether a sunspot can lead to either coordination on an inferior equilibrium (mis-coordination) or to out-of equilibrium behavior (dis-coordination). While much of the literature searches for mechanisms to attain coordination on the efficient equilibrium, we consider sunspots as a potential reason for coordination failure. We conduct an experiment with a three player 2x2x2 game in which coordination on the efficient equilibrium is easy and should normally occur. In the control session, we find almost perfect coordination on the payoff-dominant equilibrium, but in the sunspot treatment, dis-coordination is frequent. Sunspots lead to significant inefficiency, and we conclude that sunspots can indeed cause coordination failure.