The Potential of Social Identity for Equilibrium Selection

When does a common group identity improve efficiency in coordination games? To answer this question, we propose a group-contingent social preference model and derive conditions under which social identity changes equilibrium selection. We test our predictions in the minimum effort game in the laboratory under parameter configurations which lead to an inefficient low-effort equilibrium for subjects with no group identity. For those with a salient group identity, consistent with our theory, we find that learning leads to ingroup coordination to the efficient high-effort equilibrium. Additionally, our theoretical framework reconciles findings from a number of coordination game experiments.