Exploration vs Exploitation, Impulse Balance Equilibrium, and a Specification Test for the El Farol Bar Problem
40 Pages Posted: 27 Aug 2018 Last revised: 24 May 2019
Date Written: August 16, 2018
The paper reports on market-entry experiments that manipulate both payoff structures and payoff levels to assess two stationary models of behaviour: Exploration vs Exploitation (EvE, which is equivalent to Quantal Response Equilibrium) and Impulse Balance Equilibrium (IBE). These models explain the data equally well in terms of goodness-of-fit whenever the observed probability of entry is less than the symmetric Nash equilibrium prediction; otherwise IBE marginally outperforms EvE. When assuming agents playing symmetric strategies, and estimating the models with session data, IBE yields more theory-consistent estimates than EvE, no matter the payoff structure or level. However, the opposite occurs when the symmetry assumption is relaxed. The conduct of a specification test rejects the validity of the restrictions on entry probabilities imposed by EvE for agents with symmetric strategies, in 50 to 75% of sessions and it always rejects it in the case of IBE, which indicates that the symmetric variant of these models has little empirical support.
Keywords: congestion games, exploration vs exploitation, quantal response equilibrium, impulse balance equilibrium, specification test, experimental economics
JEL Classification: C7, C92
Suggested Citation: Suggested Citation