Noisy Best Response in Coordination Games

In an environment with strategic interaction, multiple equilibria yields a coordination problem and strategic uncertainty, even in the idealized setting of complete information. The resulting disequilibrium of beliefs leads to coordination failure, as demonstrated by many experiments. This paper examines two such coordination problems: the threshold game with a unitary public good and the market entry game with a finite capacity. I employ logit quantal response equilibrium to explicitly model strategic uncertainty and coordination failure. The model predicts that uncertainty generated by noisy best responders has greater influence on group-level outcomes than payoff uncertainty when agents are highly boundedly rational. I conduct a two-by-two experiment for each game and estimate the logit parameter, varying group size and information. The dominance of strategic uncertainty bears out empirically, and the logit equilibrium is able to capture certain group size and player type treatment effects, upon which standard theory is silent. J.E.L. Codes: C73, C92, D03, H41