Tuesday, November 27, 2012

Representative Democracy Works in the Lab

That is my too-simplistic summation from a cursory reading of an important new paper (what paper authored by the likes of John Nash and Reinhard Selten would not be important?) appearing in PNAS (here). The full citation is John F. Nash, Jr., Rosemarie Nagel, Axel Ockenfels, and Reinhard Selen, "The agencies method for coalition formation in experimental games," PNAS Early Edition, www.pnas.org/cgi/doi/10.1073/ pnas.1216361109 (Sept. 20, 2012). Here is the abstract:
In society, power is often transferred to another person or group. A previous work studied the evolution of cooperation among robot players through a coalition formation game with a non-cooperative procedure of acceptance of an agency of another player. Motivated by this previous work, we conduct a laboratory experiment on finitely repeated three-person coalition formation games. Human players with different strength according to the coalition payoffs can accept a transfer of power to another player, the agent, who then distributes the coalition payoffs. We find that the agencies method for coalition formation is quite successful in promoting efficiency. However, the agent faces a tension between short-term incentives of not equally distributing the coalition payoff and the long-term concern to keep cooperation going. In a given round, the strong player in our experiment often resolves this tension approximately in line with the Shapley value and the nucleolus. Yet aggregated over all rounds, the payoff differences between players are rather small, and the equal division of payoffs predicts about 80% of all groups best. One reason is that the voting procedure appears to induce a balance of power, independent of the individual player's strength: Selfish subjects tend to be voted out of their agency and are further disciplined by reciprocal behaviors.

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