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Many economic games have multiple equilibria, some of which are better than others for everyone involved. Such coordination games are of special interest to economists because they raise the possibility that a group of individuals or even a whole economy might become mired in an unfavorable situation. This paper explains how to use playing cards in the classroom to implement an economic game with multiple, Pareto-ranked equilibria. Discussion can focus on policies and institutions that promote coordination on better outcomes.
Use: This experiment can be used in introductory economics to teach concepts of team production and coordination and in intermediate microeconomics to teach game-theoretic concepts of Nash equilibrium and Pareto optimality.
Time required: Five minutes for reading instructions, 20 minutes for decision making, and about IS minutes for discussion.
Materials: You will need one or more decks of playing cards, each deck accommodating 26 people. One copy of the instructions should be made for each person. Payment to a randomly selected individual is optional and will require about a dollar or two.
1. Introduction
Coordination problems arise naturally in many economic contexts. For example, in large organizations it is necessary to synchronize specialized divisions to avoid production bottlenecks. Low effort on the part of one worker or division can hold up the whole process, and it might not be worthwhile for a particular worker to exert high effort if others are not doing the same. In this sense, the organization can reach an equilibrium in which low effort prevails, even though all would be better off if they could share the gains from a high-effort, high-output situation. A similar problem can arise in macroeconomic contexts where high employment in one sector can increase the marginal product of labor in another. Some neo-Keynesians have used coordination games to justify the possible role of macroeconomic policies to move the economy to a better equilibrium.
This paper describes how to use playing cards to set up a series of classroom coordination games with little advance preparation. Each player must make one of two decisions, which can be interpreted as "high" or "low" efforts, with high effort being more costly but potentially more productive if it is matched by others. There is an equilibrium in which all choose...