Can subsidies promote Pareto-optimum coordination? We found that partially subsidizing the cooperative actions for 2 out of 6 players in a laboratory coordination game usually produced better coordination and higher total payoffs both with deterministic and stochastic payoffs. Not only were the subsidized players more likely to cooperate (choose the Pareto-optimum action), but the unsubsidized players increased their expectations of how likely others would cooperate and they cooperated more frequently themselves. After removing the subsidy, high coordination rates continued in most groups with stochastic payoffs but declined for groups with deterministic payoffs. A post-game survey indicated that with stochastic payoffs, players focused on risk reduction. Temporary subsidies promoted lasting coordination because even after the subsidy was removed, players still assumed that other players would prefer reduced risks from cooperation. With deterministic payoffs, however, the subsidy might crowd out other rationales for coordination, with many players indicating that subsidy was the only reason for anyone to cooperate. Hence the coordination level dropped when the subsidy was removed.

In many situations, including interactive games or social networks, people often influence each others’ decisions. Examples in economics include Schelling’s (1978) tipping points on racial composition in a neighborhood, and Leibenstein’s (1950) “bandwagon effects” in which one agent’s demand for a good increase with others’ demand level. In sociology Granovetter (1978) and Watts (2002) have studied similar phenomena using network models of social interactions. The existence of mutual influence has been captured by coordination games with multiple Pareto-ranked Nash Equilibria (NE). Interdependency among airlines with respect to baggage security (Kunreuther and Heal 2003) is an example of such coordination. Airline companies have to choose whether to invest in baggage security screening equipment. Such an investment reduces the risk of bombs in bags checked on their own airline, but each company still faces indirect risks of unsafe bags transferred from other airlines that did not invest in the screening equipment. The Pareto-optimal NE is that all airlines invest in security systems. An inferior NE is that no airline invests, because each believes that the indirect risk from unsafe airlines is so high that the benefits from investing in protection is less than the costs. Other instances of interdependent security (IDS) include wildfire protection decisions (Shafran, 2008), computer network security updates (Kearns 2004), and the failure of divisions in financial organizations to control risk (Kunreuther and Heal 2005; Kunreuther 2009).