Experimental Studies of Incentive Effects, Expertise Effectsand Context Effects in Signalling Games

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Signaling games involve strategic interactions between agents where one side of a market has incomplete information about the quality characteristics of agents on the other side of the market. Models of signaling games have been applied to a wide variety of economic settings from marketing to educational decisions to strategic interactions between large corporations. Virtually all interesting signaling games have multiple equilibria (steady states), making it essential to introduce some sort of equilibrium refinements to narrow down the set of equilibria in order to predict behavior. Economic theorists have derived a number of equilibrium refinements based on plausible actions that different types of agents may or may not take. Although early experiments gave encouraging support for signaling-game refinements, later studies found violations for even the weakest of these criteria. These later researchers concluded that subjects could best be modeled as having naive initial beliefs, only slowly learning to play an equilibrium. That is, signaling game refinements (and formal game theory in general) failed to generate accurate predications of subjects' behavior because the underlying assumptions of rationality were too strong. A recent study of ours (Lo, Cooper, Kagel and Gu, 1997) suggests several reasons why the signaling game refinements should not be discarded too quickly. We find that scaling up all payoffs by a factor of five significantly increased the frequency of strategic play, presumably due to heightened deductive reasoning stimulated by the higher payoffs. This suggests that the failure of equilibrium refinements in other experiments may be a function of low payoffs. We also compared behavior by naive subjects (undergraduate students from China Textile University in Shanghai) with the behavior of more experienced subjects (textile firm managers from the Shanghai area). This comparison was made for experiments using generic terminology (e.g. firm managers are `A players,` central planners are `B players,` etc.) and for experiments in context (instructions designed to evoke the field settings in which managers would have encountered the ratchet effect). While no significant differences were found between naive and expert subjects in generic sessions, LCKG observed that the presence of context significantly increased the level of strategic play for expert subjects but did not substantially affect naive subjects. LCKG hypothesize that experts may learn to think more deductively than naive players, but may only be able to draw upon this expertise if there is some context to act as a trigger. Thus, signaling game refinements may do poorly in laboratory experiments either because subjects are naive or because subjects lack the context which allows them to call on expertise from other settings. Further, the existence of context effects reported in LCKG, in conjunction with what we know about the role of context from the cognitive psychology literature, suggests a number of possible interaction effects between context and learning that have so far been almost totally ignored in the economics literature. To explore these issues, our strategy is to construct a new game - the college admissions game - that has a contextual framework familiar to the US college student population (the most convenient population to use as experimental subjects) and to conduct new experiments with this game. Using several variations of this game, we study what effect context, incentives, and expertise, separately and together, have on learning and the emergence of equilibrium. In addition to using more traditional experimental methods, we also employ a new team-play methodology for gathering verbal data from subjects; by analyzing this data, we hope to gain direct evidence about the reasoning processes of subjects and how these processes are affected by the experimental treatments.