How do coalitions get built? Evidence from an extensive form coalition game with and without communication

In the laboratory, we investigate a non-cooperative three-person coalition game with externalities and the opportunity to extend existing coalitions. One bargainer, the builder, can propose and build a coalition over two stages. We examine the hypothesis that both absolute and relative payoffs affect the coalition formation process (and outcome). We observe many inefficient two-person final coalitions, and that the distribution of outcomes is sensitive to the constellation of both absolute and relative payoffs. Relative payoffs appear to be applied more myopically than has been observed in bilateral sequential bargaining games or suggested by social preference models. We hypothesize that the prevalence of two-person coalitions stems from builder’s uncertainty about individual acceptance thresholds. In fact, allowing nonbinding communication among the bargainers increases the prevalence of efficient coalitions. The main implication is that efficient coalition building involves strategies for mitigating the strategic uncertainty inherent in building coalitions.