Interaction Structure and the Evolution of Conventions∗

This paper studies long run equilibrium selection in 2x2 coordination games in a framework that accounts for the effect of players’ mobility, local interaction, and scale of interaction. I find that the stochastic stability of a particular convention depends both on the importance of scale effects relative to the degree of local interaction, and the efficiency and risk characteristics of a particular equilibrium. It is shown that less flexibility (increased costs of mobility) can help rather than hurt the chances of selecting efficient conventions. Allowing for heterogeneous matching characteristics, limit sets in which players of different characteristics coordinate on different actions can prevail in the long run. A tension between scale effects and the stability of the payoff dominant conventions is also identified: societies that enjoy the benefits of large scale effects and give up the stability of payoff dominant conventions can perform better in the long run. JEL Classification: C72, C73