Team Formation in Coordination Games with Fixed Neighborhoods

Abstract: This study contributes to the recent experimental literature addressing the role of team formation in overcoming coordination failure in weakest-link games. We investigate the endogenous formation of teams in fixed neighborhoods in which it is not possible to exclude players from influencing the weakest-link. Our experimental results show that team formation helps in overcoming the coordination problem, raises equilibrium provision levels, but falls short of providing the Pareto-optimal contribution. As the problem of multiplicity of Nash equilibria in weakest-link games is exacerbated when team formation is introduced, we provide Quantal Response Equilibrium (QRE) and Agent QRE analyses. The analysis demonstrates that team formation would solve the problem with (almost) perfectly rational agents, but also that our experimental results are consistent with (A)QRE models under bounded rationality.

Keywords: Weakest-link, Coalition Formation, Experimental Economics, Quantal Response Equilibrium, Agent Quantal Response Equilibrium