Decentralization and the Coordination Problem

This paper addresses the relation between the degree of decentralization in a population and the probability of coordinating on an efficient outcome. An evolutionary learning mechanism with a group structure that allows players to "vote with their feet" is introduced. In contrast to most of the recent literature (e.g. Kandori, Mailath and Rob, 1993) in which the risk dominant equilibrium is shown to prevail in the long run, in this paper it is demonstrated that given a general probability distribution over initial states the evolutionary learning process converges almost always to the efficient equilibrium if interaction is decentralized enough. Furthermore, it is shown how the model can be applied to the problem of product standardization.