Forward Induction and Other-regarding Preferences Arising from an Outside Option: An Experimental Investigation

Abstract

Based on forward induction, existing experimental studies have shown that an outside option, when offered to one of the two players who later participate in a battle-of-the-sexes game, facilitates coordination. However, the particular outside-option payoffs that these studies used may have led to certain kinds of other-regarding preferences which worked against the forward induction prediction. The current paper hypothesizes that an appropriately chosen outside option which controls for these preferences raises the predictive power of forward induction. The experimental results presented in the paper support the hypothesis.