WP 2020-05 Should I Stay or Should I Go? Equilibrium Selection in a Transportation Network

Posted On February 12, 2020
Categories Working Papers, WP 2020

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AUTHORS: Enrica Carbone, Vinayak V. Dixit, and E. Elisabet Rutström

ABSTRACT: When imposing congestion pricing in a transportation network, especially around city centers, there is an expressed concern that commercial activities will have to consider relocating. Such relocations can be both risky and costly. Charges that are aimed at shifting traffic out of downtown areas during times of days when congestion is worst have been implemented in several cities and studies show that drivers often respond very quickly to such price changes, but the effects on commercial activities are less understood. We design an experimental game where merchants predict how drivers will respond before selecting locations. The game is a binary location choice experiment involving introduction of and changes in toll charges around city centers. We model a level of toll charges that implies multiple equilibria and implement two treatments that differ in the history of experiences with toll charges to test its effect on equilibrium selection. We reject the SPNE prediction that merchants make location decisions randomly and commuters follow. Instead, our observations suggest that merchants expect commuters to take out-of-equilibrium actions in order to influence the equilibrium selection. We also find that commuters employ costly signaling actions to make this happen. Finally, our data suggests that history matters somewhat to how players react to a change in the toll charge, imposing friction into the adjustment process, but not affecting the equilibrium selection.