The Role of Subsidies in a Social Network with Interconnected Risk

Can subsidies promote Pareto-optimum coordination? We found that partially subsidizing the cooperative actions for 2 out of 6 players in a laboratory coordination game usually produced better coordination and higher total payoffs both with deterministic and stochastic payoffs. Not only were the subsidized players more likely to cooperate (choose the Pareto-optimum action), but the unsubsidized players increased their expectations on how likely others would cooperate and they cooperated more frequently themselves. After removing the subsidy, high coordination rates continued in most groups with stochastic payoffs, but declined for groups with deterministic payoffs. A post-game survey indicated that with stochastic payoffs, players focused on risk reduction. Temporary subsidies promoted lasting coordination because even after the subsidy was removed, players still assumed that others players would prefer reduced risks from cooperation. With deterministic payoffs, however, the subsidy might crowd out other rationales for coordination, with many players indicating that subsidy was the only reason for anyone to cooperate. Hence the coordination level dropped when the subsidy was removed.