Collective Risk-Taking with Threshold Effects

It is commonly found that the presence of uncertainty helps discipline economic agents in strategic contexts where incentives would otherwise induce inefficient behavior (Eso and White (2004), Bramoullé and Treich (2009)). We consider a variant of the celebrated Nash Demand Game (Nash, 1953) where two values of the resource (low and high) are possible. We show that the presence of uncertainty here may actually have an opposite effect: strategic interactions may lead groups of risk-averse agents to take inefficiently risky decisions. We then develop an experimental setting to assess the severity of the coordination problem in the lab. Our findings confirm our theoretical predictions that the (Pareto-dominant) cautious equilibria are predominantly played at the individual level. In the aggregate, however, coordination failures abound but are decreasing in the likelihood of the high value of the resource. It is only when this likelihood becomes low enough that cautious behavior translates in high rates of cautious equilibria. ∗NYU-Abu Dhabi and University of Bern †University of Geneva ‡Institute of Applied Economics, HEC Montréal. §Department of International Business, HEC Montréal