DECENTRALIZATION AND THE COORDINATION PROBLEM

This paper addresses the relationship between the degree of decentrali zation in a population and the probability of coordinating on an effic ient outcome rather than the risk-dominant outcome in a coordination g ame. The model here extends the literature on evolutionary games by su pposing that players interact in groups but that occasionally they may change groups. The main innovation is the group-changing assumption w hich allows players to 'vote with their feet.' In contrast to most of the recent literature (e.g. Kandori et al., 1993) in which the risk-do minant equilibrium is selected in the long run, the model here predict s convergence to the efficient equilibrium if interaction is decentral ized enough. Furthermore, it is shown how the model can be applied to the problem of product standardization.