This study reports an experiment that examines whether groups can better comply with theoretical predictions than individuals in contests. Our experiment replicates previous findings that individual players significantly overbid relative to theoretical predictions, incurring substantial losses. There is high variance in individual bids and strong heterogeneity across individual players. The new findings of our experiment are that groups make 25% lower bids, their bids have lower variance, and group bids are less heterogeneous than individual bids. Therefore, groups receive significantly higher and more homogeneous payoffs than individuals. We elicit individual and group preferences towards risk using simple lotteries. The results indicate that groups make less risky decisions, which is a possible explanation for lower bids in contests. Most importantly, we find that groups learn to make lower bids from communication and negotiation between group members.JEL Classifications: C72, C91, C92, D72

Abstract:This paper studies how groups resolve disagreement when they must reach unanimity after submitting individual proposals and exchanging text-form messages via a chat window in lottery choice experiments. We find that the majority proposal does not always prevail. The minority proposal prevails sometimes, especially when it is closer to risk neutrality. About one third of the groups disagrees after communication and would have got zero payoffs if disagreement remains after two more attempts without communication. In these groups, extrovert subjects are more likely to lead the group outcome than confused or conscientious subjects. Overall group choices are more coherent and closer to risk neutrality than individuals'. Checking the recorded messages, we find that the chat activity is intense, growing with the level of disagreement and aims at finding consensus. The amount and timing of chat messages help us to predict which choice prevails in the group. JEL Classifications: C92, D81

Previous experiments based on the 11–20 game have produced evidence for the level‐k model with observed levels of strategic thinking consistently ranging from 0 to 3. Our baseline treatment uses the 11–20 game and replicates previous results. We apply four models of strategic thinking to the baseline‐treatment data and use these to predict behaviour and beliefs in five other treatments that employ games with a very similar structure. The best predictive performance is achieved by models that incorporate ‘common knowledge of noise’. A model of noisy introspection, which does so, predicts behaviour remarkably well.

Costless pre-play communication has been found to effectively facilitate coordination and enhance efficiency in games with Pareto-ranked equilibria. We report an experiment in which two groups compete in a weakest-link contest by expending costly efforts. Allowing intra-group communication leads to more aggressive competition and greater coordination than control treatments without any communication. On the other hand, allowing inter-group communication leads to less destructive competition. As a result, intra-group communication decreases while inter-group communication increases payoffs. Our experiment thus provides an example of an environment where communication can either enhance or damage efficiency. This contrasts sharply with experimental findings from public goods and other coordination games, where communication always enhances efficiency and often leads to socially optimal outcomes. JEL Classifications: C70, D72, H41

We compare two mechanisms to implement a simple binary choice, e.g. adopt one of two proposals. We show that when neither alternative is ex ante preferred, simple majority voting cannot implement the first best outcome. The fraction of the surplus lost rises with the number of voters and the total surplus loss diverges in the limit when the number of voters grows large. We introduce a simple bidding mechanism where votes can be bought at a quadratic cost and voters receive rebates equal to the average of others' payments. This mechanism is budget-balanced, individually rational, and fully efficient in the limit. Moreover, the mechanism redistributes from those that gain from the outcome to those that lose and everyone is better off under bidding compared to voting. We test the two mechanisms in the lab using an environment with "moderate" and "extremist" voters. In the first part of the experiment, subjects gain experience with both bidding and voting. Then they collectively decide which mechanism applies in the second part. This endogenous choice of institutions provides clear evidence in favor of bidding: with groups of size eleven, 90% of the groups opt for the bidding mechanism. The observed efficiency losses under voting are close to theoretical predictions and significantly larger than under bidding. Because of redistribution, the efficiency gain from bidding benefits mostly the moderate voters. Observed behavior under the bidding mechanism deviates from theoretical predictions to some extent, which can be explained by a quantal response equilibrium model if we assume that voters overestimate the chance of being pivotal. These deviations hardly reduce any of the efficiency-improving effect of the bidding mechanism, which supports its adoption in real-world applications.