Social Coordination with Locally Observable Types

In this paper we study the typical dilemma of social coordination between a riskdominant convention and a payoff-dominant convention. In particular, we consider a
model where a population of agents play a coordination game over time, choosing both
the action and the network of agents with whom to interact. The main novelty with
respect to the existing literature is that: (i) agents come in two distinct types, (ii)
the interaction with a different type is costly, and (iii) an agent’s type is unobservable
prior to interaction. We show that when the cost of interacting with a different type is
small with respect to the payoff of coordination, then the payoff-dominant convention
is the only stochastically stable convention; instead, when the cost of interacting with
a different type is large, the only stochastically stable conventions are those where all
agents of one type play the payoff-dominant action and all agents of the other type
play the risk-dominant action.