Outsourcing with Identical Suppliers and Shortest-First Policy: A Laboratory Experiment

• Authors: Flip Klijn.
• BSE Working Paper: 112122 | November 15
• Keywords: laboratory experiment , social preferences , outsourcing , game theory , social costs , shortest-first policy
• JEL codes: C72, D71, D82
• laboratory experiment
• social preferences
• outsourcing
• game theory
• social costs
• shortest-first policy

We study experimentally in the laboratory two 2-player games that mimic a decentralized decision-making situation in which firms repeatedly outsource production orders to multiple identical suppliers. The first game has a unique (inefficient) equilibrium in mixed strategies, while the second game has two (efficient) equilibria in pure strategies and an infinite number of (inefficient) equilibria in mixed strategies. In both games, the optimal social costs can also be obtained via dominated strategies. We find that only in the second game subjects manage to reach an efficient outcome more often when matched in fixed pairs than when randomly rematched each round. Surprisingly, this is because subjects coordinate on dominated strategies (and not an efficient pure strategy equilibrium). We show theoretically that preferences for efficiency cannot explain our experimental results. Inequality aversion, on the other hand, cannot be rejected.