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Cost-sharing in directed networks: experimental study of equilibrium choice and system dynamics


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Authors

Liu, C 
Rapoport, A 

Abstract

This study reports the results of an experiment on directed networks with positive externalities induced by cost-sharing. Subjects participated in a network game in which they had to choose between private and public transportations. If a player chose public transportation, then she shared the travel cost equally with other players making the same choice, whereas if she chose private transportation, then her travel cost was fixed. Travel costs on the private route were manipulated across the two experimental conditions. In one condition, these costs were homogeneous among players; in the other condition, they were heterogeneous among players and only privately known. We found that half (none) of the player groups in the homogeneous (heterogeneous) condition converged toward the efficient equilibrium. Examination of the system dynamics shows that convergence toward efficiency was facilitated by: (1) the existence of an intermediate equilibrium choice; and (2) strategic teaching by which a farsighted player chooses strategies with poor short-term payoff in order to shift group decisions to the efficient equilibrium and thereby increase her own long-term benefit.

Description

Keywords

Cost-sharing, System dynamics, Positive externalities, Experiment

Journal Title

Journal of Operations Management

Conference Name

Journal ISSN

0272-6963
1873-1317

Volume Title

39-40

Publisher

Wiley
Sponsorship
This research was supported by NSF Grant SES-1418923 awarded to the University of Nevada, Las Vegas.