Outsourcing with identical suppliers and shortest-first policy: a laboratory experiment

Flip Klijn, Marc Vorsatz

    Research output: Contribution to journalArticleResearchpeer-review

    Abstract

    © 2016, Springer Science+Business Media New York. We study experimentally in the laboratory two 2-player games that mimic a decentralized decision-making situation in which firms repeatedly outsource production orders to multiple identical suppliers. The first game has a unique (inefficient) equilibrium in mixed strategies, while the second game has two (efficient) equilibria in pure strategies and an infinite number of (inefficient) equilibria in mixed strategies. In both games, the optimal social costs can also be obtained via dominated strategies. We find that only in the second game subjects manage to reach an efficient outcome more often when matched in fixed pairs than when randomly rematched each round. Surprisingly, this is because subjects coordinate on dominated strategies (and not an efficient pure strategy equilibrium). We show theoretically that preferences for efficiency cannot explain our experimental results. Inequality aversion, on the other hand, cannot be rejected.
    Original languageEnglish
    Pages (from-to)597-615
    JournalTheory and Decision
    Volume82
    Issue number4
    DOIs
    Publication statusPublished - 1 Apr 2017

    Keywords

    • Game theory
    • Laboratory experiment
    • Outsourcing
    • Shortest-first policy
    • Social costs
    • Social preferences

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