GAME THEORY FOR PLAYING GAMES: SOPHISTICATION IN A NEGATIVE-EXTERNALITY EXPERIMENT

"We explore the extent to which the lack of Nash payoff maximization in experimental games is attributable to the "sophistication" of participants (i.e., their understanding of strategic decision making and profit-maximizing decisions). To this end, we compare the behaviors of sophisticated participants (i.e., those who have been exposed to the concepts of game theory) against those of a more standard subject pool in a moral hazard environment. Results suggest that sophisticated subjects are significantly more likely to adopt strategies predicted by standard theory and arrive at a Nash equilibrium. "("JEL "C72, C91, C92, D63, D64) Copyright (c) 2008 Western Economic Association International.