Pre-play communication with forgone costly messages: experimental evidence on forward induction

Abstract

We study communication in a two-player coordination game with Pareto-ranked equilibria. Prior research demonstrates that efficient coordination is difficult without communication but obtains regularly with (mandatory) costless pre-play messages. In a laboratory experiment, we modify communication by making the sending of messages optional and costly. Even small costs dramatically reduce message use, but efficient coordination of actions occurs with similar frequency to that observed under costless communication. Our results can be accounted for by Govindan and Wilson's formalization of forward induction (GW-FI), which selects, among the pure-strategy equilibrium outcomes, the one in which efficiency is achieved without communication. Consistent with the introspective character of GW-FI, the fraction of players who achieve efficient coordination by forgoing the use of reasonably costly optional messages is substantial from the first period, is remarkably stable at that level, and is not significantly affected by learning.