Economic Consequences of Global Accounting Convergence:
An Experimental Study of a Coordination GameSATOSHI TAGUCHI* MASAYUKI UEEDA
Faculty of Commerce,
DOSHISHA UNIVERSITYKAZUNORI MIWA

SATORU MIZUTANISchool of Business,
Graduate School of Economics, Faculty of Business Administration,
AOYAMA GAKUIN UNIVERSITY OSAKA UNIVERSITYTEZUKAYAMA UNIVERSITY

ABSTRACTThis paper examines whether the movement toward convergence of the International
Financial Reporting Standards (IFRS) has ended. The methodology for this research isbased on comparative institutional analysis and experimental game theory. In addition,
we adopt a 3×3 coordination game because an essential factor of global accounting
convergence is the coordination of accounting standards. The results confirm thetermination of a movement toward the convergence of IFRS. Namely, our experiments
indicate that global accounting convergence toward IFRS may not be successful. Thisis because some “egoist ” countries maintain their initial systems and do not enter longterm cooperation.
JEL Classification: D74; F55; K22; M41; M48; P51
Key Words: NIA Approach; IFRS; Convergence; Coordination Game; Equilibrium
Selection

1. Introduction
The globalization of trade and the rise of multinational corporations have led to the need forinternationally harmonized accounting standards and practices to replace the disarray of varied
and sometimes clashing national systems. To this end, the International Financial ReportingStandards (IFRS), developed and overseen by the IFRS Foundation and the International
Accounting Standards Board (IASB), have thus far been adopted by numerous countries.
* Corresponding Author. Address Imadegawa-d ri Karasuma Higashi-Iru, Kamigyo-ku, Kyoto, JAPAN. Telephone +81-75-251-3665 E-mail staguchi@mail.doshisha.ac.jp This work was supported by JSPS KAKENHI Grant Number
23653118.
Received March 31, 2013; accepted October 7, 2013; available online December 9, 2013 (Advance publication by J-STAGE)
DOI: 10.11640/tjar.3.2013.04
Copyright©2013 Research Institute for Economics & Business Administration - Kobe University.

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This paper examines whether the movement toward convergence of IFRS has ended.
According to IASB, their primary objective is“To develop a single set of high quality, understandable, enforceable, and globally accepted IFRSs
through its standard-setting body, the IASB.1 ”

In other words, IASB is attempting to develop a sole accounting standard for the world andis a leading force behind convergence. Convergence thus far has gained strong global support,with over 100 countries including China and those in the EU having either adopted thestandards in full or in part or planning to do in the future.
However, despite this support and a business case for such convergence, the harmonization
process has run into problems. Neither the U.S. nor Japan, two economically powerful countries,
have yet adopted IFRS while other countries have delayed implementation. Thus, the prospectof total global accounting standards convergence remains uncertain. This study focuses on thereasons for the failure of global accounting standards to converge toward “a single set of highquality, understandable, enforceable, and globally accepted IFRSs.” These difficulties are in keepingwith many other attempts at global coordinated action.
The methodology in this research is based on comparative institutional analysis (Aoki 2001;
Grief 2006) and experimental game theory (Camerer 2003; Binmore 2010). In addition, we
adopt a 3×3 coordination game because an essential factor of global accounting convergence isthe coordination of accounting standards (Hail et al. 2010a, 2010b; Taguchi 2009).
We present the coordination game as a base model, derive its implications, and comparethem with the results from experiments we conducted. Although the pure strategy Nashequilibrium of game theory anticipates global accounting convergence, our experiments indicate
two possibilities: (1) convergence to only a current accounting system (e.g., the U.S. GAAP)
rather than a new accounting system (e.g., IFRS) and (2) many countries adopt the “Stay ”
strategy whereby they maintain their own initial systems and do not cooperate with each other,thus becoming “egoists.” 2 We also show the theoretical background of the experimental results.
Our results were supported by the equilibrium selection theory (Proposition 3) and a mixed
strategy (Proposition 4 and Prediction).
The remainder of the paper is organized as follows. The next section discusses related
literature. Sections 3 and 4 develop the model and explain the experimental design. Section 5
presents the experimental results. Section 6 offers a summery and concluding remarks.

2. Related Literature
2.1 Arguments for and against convergence

There are many arguments for and against IFRS (Hail et al. 2010a, 2010b). Some studies
support convergence for the benefit of comparability 3 of financial statements and network
The quotation is taken from the IASB website (http://www.ifrs.org/The+organisation/IASCF+and+IASB.htm).
In this paper, we define “egoists ” (or an “egoist ” player) as a subject who would like the other player to cooperate withhim/her and adopts the “Stay ” strategy (maintains his/her own initial system).
3
IASC (1989) lists “comparability” as an essential factor of financial statements.
1
2

Taguchi, Ueeda, Miwa and Mizutani: Economic Consequences of Global Accounting Convergence:
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externalities (De Franco et al. 2009; Meeks and Swann 2009; Katz and Shapiro 1994). Other
researchers oppose convergence and believe standard setting should be left to competition
because the current standard setter is a monopoly (Dye and Sunder 2001). For example, Sunder(2002) has stated that competition helps create more efficient regulations. Although manyarguments exist for and against the idea of convergence, minimal attention has been focused on
conflict and coordination among countries regarding accounting standards. In addition, since theconsequences of global convergence have not been predicted, this point remains open for
discussion.

2.2 Limitations of archival studies and needs of experimental studies

Several empirical studies have examined the usefulness of IFRS (Barth et al. 2008; Daske etal. 2008), but they were only partial verifications that lacked cost-benefit analysis of adopting asingle set of standards at the international level. Therefore, we experiment with artificial
situations to discover more about such benefits and consequences.
The methodology in this research is based on comparative institutional analysis (Aoki 2001;
Grief 2006) and experimental game theory (Camerer 2003; Binmore 2010). We test thepredictions of game theory by experimentation.

2.3 New institutional accounting approachThis study also relates to the research framework for new institutional accounting (NIA),
advocated by Wysocki (2011) who focuses on mutual dependence among various institutions,
including those specializing in accounting. He stresses that financial reporting by enterprises isinfluenced by numerous institutional factors other than accounting standards, such as thoserelated to law, auditing, capital market forces, ownership structures, and governance structures.
Thus, in the current state of affairs in that many institutional factors differ by country and region,
global convergence of accounting standards might have little essential meaning. This suggeststhat it will be difficult for IASB to achieve its goal of establishing a single set of globally accepted
accounting standards. We address this issue by considering the convergence of accounting
standards as a coordination problem among countries.

2.4 Related models and their limitations

Among earlier studies, Su and Guo (2006) and Fujii (2007) explained the convergenceproblem using a 2×2 coordination game. By assuming the existence of System A and System B,
each player (player 1 or 2) decides which system to adopt. Each player is assumed to benefit bysharing his/her system (for example, the benefit in this case is assumed to be 1). Table 1
represents the payoff table for this game.
As is shown in Table 1, in their version of the game, the following two scenarios become
pure-strategy Nash equilibria.
(Strategy of player 1, Strategy of player 2)＝(System A, System A)(Strategy of player 1, Strategy of player 2)＝(System B, System B)
However, these express a game in which each player’s first selection of a system is madeunder conditions in which neither had previously adopted any such system. This merely depicts
a scenario in which a country that has not previously adopted any accounting standards selects

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TABLE 1: SIMPLE SYSTEM SELECTION GAMETABLE 2: SYSTEM SELECTION GAME 2: WHEN EACH PLAYER HAS ALREADY ADOPTED
A SYSTEM AT THE INITIAL STAGE

one for the first time and obtains benefits by coordinating with other countries. Therefore, abetter fit for explaining the actual situation is a scenario that presupposes each player has alreadyadopted a type of accounting standard (System A or B). In sum, the limitation of this model isthe assumption of a situation in that no initial system exists.
Next, we expand this model and consider a scenario in which each player has alreadyadopted a system at the game’s initial stage. For example, player 1 adopts System A, while player
2 adopts System B. Moreover, the base state of each player (the benefit at the initial stage) is set
as 1. If players have previously adopted the same system as another player, they receive anadditional benefit of 2. Moreover, the cost of changing systems is assumed to be 1 for eachsystem. The payoff table in this case is represented in Table 2.
As is shown in Table 2, in this game, the following two scenarios become pure-strategy
Nash equilibria.
(Strategy of player 1, Strategy of player 2)＝(System A, System A)(Strategy of player 1, Strategy of player 2)＝(System B, System B)
Moreover, it can be understood from these scenarios that adopting an action thatcoordinates with the system adopted by the other party is the best response for both players.
We must account for the fact that both players will obtain different benefits depending onwhether the system is coordinated as System A or System B. More specifically, on the one hand,
it is preferable for player 1, who originally adopted System A, to coordinate the whole system as
A (i.e., player 2 selects A) than to coordinate it as B (player 1 changes his/her choice to System
B to coordinate with player 2). On the other hand, for player 2, who originally adopted System
B, coordinating the whole system as B (i.e., player 1 selects B) is preferable to coordinating it as
A (player 2 changes his/her choice to System A to coordinate with player 1). When we consider
this in the context of accounting standards, the above-mentioned scenarios indicate that thepreferable situation for us is the one in which other countries coordinate its accounting standards
to ours. In other words, because benefits accrue from coordinating accounting standards,
adopting a strategy coordinated with the behavior of the other party becomes the mutually best
response (therefore, the combination of such strategies becomes a Nash equilibrium). However,Taguchi, Ueeda, Miwa and Mizutani: Economic Consequences of Global Accounting Convergence:
An Experimental Study of a Coordination Game107

if we consider the costs required to switch systems, it is preferable for us if the other country
coordinates its accounting standards with ours, rather than we give up our accounting standards
and coordinate with another country’s.
The above system-selection problem describes one where accounting standards already exist
in each country. Namely, the expressed problem requires parties to choose to coordinate
according to the accounting standards of one country or another. However, the actual problem
for international accounting standards does not match the model of needing to coordinate
accounting standards already adopted by one country or another. Rather, it is a question ofwhether to converge on new accounting standards (namely, the IFRS), or maintain the statusquo. In other words, there is a need to envisage a coordination game that adds a “third choice”
and create an appropriate model. Given this need, we present a new model that modifies themodel used in previous research in the following aspects:
1. Introduction of an initial-period adoption system (introduction of system-change costs)
2. Introduction of a new “third choice”
Taguchi (2009) adopted these two aspects as a 3×3 coordination game. We use the
Taguchi’s (2009) model in the next section.

3. ModelThe model of this study is based on the 3×3 coordination game developed in Taguchi(2009). This is because that model has two aspects (the initial system and a “third choice,”discussed in section 2) and an essential factor of global accounting convergence is thecoordination of accounting standards (Hail et al. 2010a, 2010b; Taguchi 2009).
Our model is a simple coordination game with players 1 and 2, each of whom represents acountry 4 that chooses a system from System A, B, and N as a strategy. 5 It is assumed that
Systems A and B have been respectively assigned to players 1 and 2 as their own initial systems
and it entails a financial cost for each player to change the systems (Figure 1). When players
adopt the same system, they each receive benefits from coordination (Figure 2), which include
benefits from network externalities (Katz and Shapiro 1994) and the comparability of financial
statements (IASC 1989).
Each player chooses one of three strategies: The first strategy for a player is to choose notto change the initial system (the “Stay” strategy), which we call S. The second strategy is tochoose his/her partner (the other player) initially adopt (the “Other” strategy), which we call O.
While enterprises as well as governments implement accounting standards and are more likely to operate acrossmultiple nations, thereby facing varied accounting standard systems directly, our study uses states as the actors in
our model for two reasons. First, states are ultimately the bodies with the legal power to determine and impose
standards within their geographic region of authority. Second, enterprises are assumed to have avenues ofrepresentation within/to the state, so state action is assumed to take the interests of enterprises within its area into
consideration.
5
In reality, there are various levels of accounting convergence (see section 6). In this study, we simplify the modelby considering only two possibilities, namely whether an accounting system has been adopted. This approach has
been used in previous studies.
4

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FIGURE 1: SETTING (1)

FIGURE 2: SETTING (2)The third strategy is to choose the new system (the “New” strategy), which we call N.
The existence of each state’s initial system and the costs to change them are the mostimportant factors to consider when examining and undertaking institutional change. In reality,
countries have pre-existing accounting standards, and making changes to such standards comeswith a cost. These factors are known as institutional inertia (Aoki 2001) or a focal point(Schelling 1960).
We focus on the payoff function for players 1 and 2, shown in the following equation as
benefit minus cost:ðh 厩 bij芋chk茨T.

(1)

Taguchi, Ueeda, Miwa and Mizutani: Economic Consequences of Global Accounting Convergence:
An Experimental Study of a Coordination Game109

TABLE 3: PAYOFF MATRIX

Here, T is the endowment for each player. The benef it of coordination is shown as bij, which
is derived by comparability and network externalities. In addition, it benefits player h when player
1 adopts strategy i (i＝S, O, N ) and player 2 adopts strategy j (j＝S, O, N ). Denote by chk the costto change systems when player h chooses strategy k (k＝S, O, N ). We assume costs as follows:bSO 瓜 0, bOS 瓜 0, bNN 瓜 0, bSS 厩 bOO 厩 bSN 厩 bNS 厩 bON 厩 bNO 厩 0.

(2)

c1S 厩 c2S 厩 0, c1O 瓜 0, c2O 瓜 0, c1N 瓜 0, c2N 瓜 0.

(3)

The payoff matrix is shown in Table 3.

3.1 Equilibrium (1): dilemma of IFRSIn this subsection, we run our model using several variations of the costs and the benefits foreach actor that will weight their decisions in different directions. There are four variations.
The first is the base model that meets three conditions:
芋(1) Each benefit is at the same level (bSO 厩 bOS 厩 bNN 厩 b).
(2) Each cost is at the same level (c1O 厩 c2O 厩 c1N 厩 c2N 厩 芋c ).
芋 芋(3) Each benef it exceeds each cost (b 芋c 瓜 0).
In the second variation, each cost is at the same level (c1O 厩 c2O 厩 c1N 厩 c2N 厩 c ), but eachbenefit differs. The third variation has each benefit at the same level (bSO 厩 bOS 厩 bNN 厩 b), buteach cost differs. The fourth variation sees both benefits and costs differing.
As the first step in our analysis, we examine the base model. Table 4 shows the payoff matrix
for the base model.
In addition, Table 5 shows the payoff matrix for the base model in the simple case of芋c 厩 1.
T 厩 1, b 厩 2, 芋A pair of strategies in a two-player game is defined to be Pareto optimal if there is no otherpair of strategies that strictly increase the payoff of one player without decreasing that of theother player, and equitable if the associated payoffs of the two players are equal. The following
proposition shows properties of Nash equilibria in pure strategies of the game.
Proposition 1. Nash equilibrium and its characteristics (Taguchi, 2009).
The Nash equilibria in pure strategies are:(Strategy of player 1, Strategy of player 2)＝(S, O), (O, S), (N, N).
The Nash equilibria (S, O) and (O, S) are Pareto optimal but are not equitable. On the other
hand, the Nash equilibrium (N, N) is equitable but not Pareto optimal.

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TABLE 4: PAYOFF MATRIX OF THE BASE MODELTABLE 5: PAYOFF MATRIX OF THE BASE MODEL IN WHICH T＝1, b ＝2, c- ＝1

As seen in Proposition 1, this case includes multiplicity of equilibria, wherein equilibrium is
not specifically determined. This proposition presents two implications for global accounting
convergence.
First, there are three patterns of “a single set of accepted international financial reporting
standards ” by the IASB. There is no natural result wherein countries worldwide adopt a
particular accounting system a priori, although IASB aims at the Nash equilibrium (N, N ).
Second, the proposition also shows the relationship among the three equilibria, in which
trade-offs between equity and efficiency exist. We call this trade-off “the first dilemma of IFRS.”
Although IASB aims for the equilibrium (N, N ), it is not Pareto optimal but “fair.” In addition,
we may suppose that the player who aims for equilibrium (S, O ) or (O, S ) is the U.S. For
example, it appears that the U.S. Securities and Exchange Commission aims for convergence toStatements of Financial Accounting Standards since the payoff for the U.S. would be higher
than that for other countries.

3.2 Equilibrium (2): Mixed strategy Nash equilibrium

In this subsection, we solve the mixed extension of the same game. The following
proposition shows the existence of a mixed strategy Nash equilibrium other than the Nashequilibria in pure strategies of the game.
Proposition 2. Mixed strategy Nash equilibrium of the base model.
For players 1 and 2 to choose S with probability 50% and N with probability 50% is a mixed
strategy Nash equilibrium of the base model.
Proof. See Taguchi (2012).
This proposition implies that the state (N, N ) may be attained even though it is not Pareto
optimal and there are “Other” Pareto optimal states. We call this “the second dilemma of IFRS.”Taguchi, Ueeda, Miwa and Mizutani: Economic Consequences of Global Accounting Convergence:
An Experimental Study of a Coordination Game111

3.3 Hypotheses

We propose the following hypotheses for the base model:

Hypothesis 1 (based on the first dilemma of IFRS).
H1-1. Each player adopts each of the strategies S, O, and N with the same probability.
H1-2. Each of the strategy profiles (S, O ), (O, S ), and (N, N ) is realized with the same probability.
Hypothesis 2 (based on the second dilemma of IFRS).
H2-1. Each player adopts both S and N with the same probability.
H2-2. Only (N, N) is realized.

4. Experimental design
芋To explain our experimental design, we again use the case in which T ＝1, b 厩 2, and芋c 厩 1 (Table 5).
We report data from 34 subjects shown in the design table 6, collected in two separate
sessions, with 14-20 subjects typically participating in each session.
All sessions were conducted at Doshisha University in Japan. Subjects were primarily
undergraduate students from Doshisha University recruited by advertisements and e-mail. Dueto the abstract and relatively simple nature of the decision task, a background in accounting was
not a prerequisite for participation. No one participated in more than one session of thisexperiment. Each participant took part in 20 rounds of decision making.6 Participants took about
90 minutes (including instructions) to complete and earned about ￥2,578 on average.
The experiment was run on networked computers using the z-Tree experiment software
package (Fischbacher 2007) (Figure 3). Our 3×3 matrix model is a single-period one in which
both nations are assumed to simultaneously decide and cannot interact with each other. Theseassumptions may hinder them from choosing more co-operational decisions. However, as Licht(1999, 82) suggested, understanding how a single-period model works in the laboratory isimportant for clarifying the underlying conflict that requires reconciliation. Therefore, oursubjects were asked not to directly communicate with one another, and the only interactions were
via a computer program. Also, all treatments randomly re-matched the pairs of subjects in eachperiod to minimize the potential impact of reciprocal concerns.
At the beginning of a session, each subject separated by partitions in a laboratory and given
written instructions. Instructions were also read aloud to subjects in an attempt to make the rulesof the game common knowledge. After this, subjects took a quiz to ensure they understoodthem. We strove for neutral terminology in the instructions.
After action choices were entered, each subject was shown the following information:
his/her own action, another’s action, and his/her own payoff (Figure 4). In all treatments,
subjects were not given information, either individually or in aggregate, about the results of other6

We know that the change in accounting standards has been slow and that once nations have switched theirstandards it would be difficult to undo. However, conventional wisdom insists that subjects adjust their strategies
with replications and convergence to equilibrium. We address whether and how equilibrium is achieved in the next
section.

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TABLE 6: CHARACTERISTICS OF SUBJECTS (BASE MODEL)FIGURE 3: Z-TREEFIGURE 4: INFORMATION AFTER ACTION CHOICES WERE ENTERED

Taguchi, Ueeda, Miwa and Mizutani: Economic Consequences of Global Accounting Convergence:
An Experimental Study of a Coordination Game113

pairs of subjects. At the end of each round, subjects were asked to observe their results and enter
the information from that round into a record sheet.
The experimental session ended after round 20. Each subject received his/her earnings from20 rounds at the rate of ￥50 per point. Additionally, all subjects received ￥1,000 for showingup.

5. Results of the Base Model Experiment
5.1 Personal decision: rates of strategies that subjects adopted

In total, 34 subjects participated, and each played 20 rounds, producing 680 observations.
To show the results of the experiment, we focus on the rates of the strategies that subjects
adopted, as shown in Table 7 and Figure 5.
Contrary to our hypotheses, results clearly indicated that subjects tended either to maintaintheir initial system or to adopt their partner’s system, but not System N. The probability that
subjects adopted System N was significantly lower according to the chi-square test (1%). The
results rejected H 1-1 and H 2-1.
Next, we focus on these rates in a time series. As seen in Figure 6, the results clearly indicatethat subjects tend to first maintain their initial system and then adopt their partner’s system.
From rounds 1-20, the probabilities of adopting the “Stay ” strategy (maintain their initialsystem) and adopting the “Other ” strategy (adopt their partner’s system) were high.

5.2 Matching: rates of the combination of strategies

As seen in Table 8 and Figure 7, the percentage of Pareto optima (S, O ) and (O, S ) in theobservations was 47.35% and that of the equitable Nash equilibrium (N, N ) was 0%. This result
is surprising. The concept of Nash equilibrium predicts that (N, N ) would be realized, but theexperimental results rejected H1-2 and H2-2.
This finding demonstrates our first implication for global accounting convergence.
Theoretically, there are two possible economic consequences of global accounting convergence.
First, we have three possible patterns of “a single set of accepted IFRS”: (S, O ), (O, S ), and (N,N ). We have named this “the first dilemma of IFRS.” Second, using the concept of mixed
strategy, we may have only one pattern of “a single set of accepted IFRS”: (N, N ). We havenamed this “the second dilemma of IFRS.”In our experiment data, there were many observations of the unequitable Nash equilibria (S,O ) and (O, S ). On the other hand, there was no observation of the equitable Nash equilibrium(N, N ) although IASB currently plans a convergence to (N, N ).
The literature offers two explanations of why countries might spurn convergence despite thebenefits. One type, which we call the “egoists,” is defined as a subject who would like the otherplayer to cooperate with him/her and adopts the “Stay ” strategy (maintains his/her own initialsystem). The U.S. would be categorized into this type. The other type, which we call the“generous,” is represented by Japan. Such two countries would attain the “unfair” equilibria of (S,O ) and (O, S ). Therefore, we return to our main research question: Will the movement toward
convergence of IFRS finally end? The answer is “Yes.” The termination will be confirmed if
IASB plays a central role in the convergence and it is the current style under observation. There
will be another story of global convergence if the U.S. is central to the convergence according

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TABLE 7: RATES OF THE STRATEGIES THAT SUBJECTS ADOPTED (BASE MODEL EXPERIMENT)FIGURE 5: RATES OF THE STRATEGIES THAT SUBJECTS ADOPTEDFIGURE 6: RATES OF THE STRATEGIES THAT SUBJECTS ADOPTED IN TIME SERIES

with the “unfair” equilibria of (S, O ) and (O, S ).
In addition, the percentage of (S, S ) was relatively high (38.82%). This strategy prof ile
represents that players 1 and 2 respectively adopt Systems A and B, each of which is the initialsystems of the player that chooses. This means that each subject did nothing by him/herself andwanted the other player (his/her partner) to change his/her initial system. This result is also
contrary to the prediction of Propositions 1 and 2.
This result produces our second implication for global accounting convergence. Theoretically,Taguchi, Ueeda, Miwa and Mizutani: Economic Consequences of Global Accounting Convergence:
An Experimental Study of a Coordination Game

115

TABLE 8: RATES OF THE COMBINATIONS OF STRATEGIES (BASE MODEL EXPERIMENT)FIGURE 7: RATES OF THE COMBINATIONS OF STRATEGIES IN TIME SERIES

neither player will adopt the Stay strategy. Contrary to this theoretical prediction, however, ourexperiment revealed that there is a high possibility that the strategy combination of (S, S ) will
be adopted. With reference to accounting coordination, therefore, the results of our experiments
indicate the likelihood that countries will do nothing and maintain their initial systems. This
raises the question: Why was the rate of the combination of (S, S ) higher? One possible
explanation is “institutional inertia.” To achieve the equilibrium of (N, N ), all players mustcooperate. However, if one party betrays such cooperation, the other will bear the cost andreceive no overall benefit (i.e., a net loss). As a result, the losing party will have no incentive tocooperate. In other words, if all players become “egoists,” coordination will be impossible.7

5.3 Theoretical background of the result

The experimental results did not support Hypothesis 1 or 2.
To analyze this gap between theoretical and actual outcomes, we will examine two factors.
The first factor is the equilibrium selection from the three pure strategy Nash equilibria. The
incidence rate of the two equilibria (S, O ) and (O, S ) was 47.35%, and that of the otherequilibrium (N, N ) was 0%. We consider why (S, O ) and (O, S ) were achieved and (N, N ) was
eliminated. The second factor is the likelihood of (S, S ). We investigate why its incidence rate
was so high in spite of the fact that (S, S ) is not a Nash equilibrium in pure strategies.
7

We explain more theoretically why the rate of the combination of (S, S ) is so high (section 5.3).

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5.3.1 Equilibrium selection problem
First, the equilibrium selection problem will be discussed. This game is constructed frommultiple Nash equilibria. An equilibrium selection theory, which can be employed to determine
the selection of an equilibrium, is required to resolve this problem of multiple equilibria(Harsanyi and Selten 1988). There are two important concepts in the equilibrium selection
theory: payoff dominance and risk dominance.
Payoff dominance asserts that among multiple equilibria, the one that payoff dominates will
be selected. Risk dominance asserts that among multiple equilibria, the equilibrium point having
a large player’s deviation loss product will dominate. Propositions such as those described below
can be specifically derived on the basis of the base model.
Proposition 3. Payoff-dominance Equilibrium and Risk-dominance Equilibrium in the BaseModel
Of the multiple equilibria in the base model, no payoff-dominance equilibrium exists. The riskdominance equilibria are (S, O) and (O, S).
Proof. See Appendix.
From the perspective of Proposition 3, the equilibria (S, O ) and (O, S ) are chosen becauseof risk dominance. This is consistent with our experimental results.
5.3.2 Why was the rate of (S, S) so high even though (S, S) was not a Nash equilibrium?
In this subsection, we discuss why subjects selected a strategy profile other than a Nashequilibrium. In the experiment, the incidence rate of (S, S ), which is not a Nash equilibrium inpure strategies, was very high (38.82%). We carefully examine a reason for that result. The key
concept used here is a mixed strategy Nash equilibrium. More specifically, Proposition 2 statedthat there was a Nash equilibrium in mixed strategies of the base game. Moreover, this game has
another mixed strategy Nash equilibrium.
Proposition 4. Mixed strategy Nash equilibrium of the base model.
For players 1 and 2 to choose S with probability 75% and N with probability 25% is a mixed
strategy Nash equilibrium of the base model.
Proof. See Appendix.
When the types of strategy combinations that arise together are calculated on the basis of
Proposition 4, the following prediction can be made.
Prediction. The incidence rates of strategy profiles(S, O) or (O, S), (S, S), and (O, O)
in the base model are respectively
6/16 (37.5%), 9/16 (56.25%), and 1/16 (6.25%).

Taguchi, Ueeda, Miwa and Mizutani: Economic Consequences of Global Accounting Convergence:
An Experimental Study of a Coordination Game117

The above-mentioned prediction is consistent with the experimental results in which there
were many observations of (S, S ) and no observation of (N, N ).

6. Conclusion
We have examined whether the movement of global convergence toward IFRS reaches anend. The main implication is derived from an experiment of the base model. Although theconcept of pure strategy Nash equilibrium of game theory predicts global accounting
convergence, the results from our experiment indicate two alternate possibilities: (1) the global
accounting converges to an existing system (e.g., the U.S. GAAP) rather than a new system (e.g.,
IFRS) and (2) many countries maintain their own initial systems and do not cooperate with eachother (we have named such countries “egoists”). We have also found that our experimental results
were supported by two other concepts of game theory. One is risk-dominance (Proposition 3).
The other is mixed strategy Nash equilibrium (Proposition 4 and Prediction). By employing asimple coordination game, our study provides a first step toward a better understanding of the
failure of global accounting standards to fully converge.
Some issues to be discussed in the future are as follows. First, one can develop ourcoordination model by incorporating additional options such as changes in strategies based on
the concept of Nash equilibrium as we did. Second, one can extend our coordination model toa sequential-decision game in which each player sequentially makes a decision, or to a signaling
game in which players have a communication tool. Third, one can investigate factors ormechanisms that stabilize global accounting convergence. For example, Taguchi (2012) proposesa correlated equilibrium model for the stabilization.

Appendix
A.1 Proof of Proposition 3

We define payoff dominance and risk dominance. We denote the set of pure strategies forplayer i by Si ,芋i.e., Si 厩 {S, O, N}, where S ＝“Stay,” O ＝“Other,” and N ＝“New.” The payoff蔭 袷 袷function of player i is ui: S1稲S2 臆 . Suppose (s蔭
1 , s2 ), (s1 , s2 ) 頴 S 1稲S 2 are Nash equilibria.
袷 袷
袷 袷
蔭
蔭
蔭
Nash equilibrium (s1 , s2 ) payoff dominates (s1, s2) if ui (s蔭
1 , s2 ) 瓜 ui (s1 , s2 ) for player i ＝1, 2. In
袷 袷
蔭
蔭
蔭
蔭蔭
蔭
contrast, Nash equilibrium (s1 , s2 ) risk dominates (s1, s2) if {u1 (s1 , s2 )芋u1 (s1袷, s蔭2 )}{u2 (s1 , s2 )芋
8
袷
袷
袷
袷
袷
袷
袷
袷
, s2)} 瓜 {u1 (s1, s2)芋u1 (s蔭u2 (s1蔭
1 , s2 )}{u2 (s1 , s2 )芋u2 (s1 , s2 )} .
We consider our base model. By following the above definition, we find no payoff
dominance relationship among (S, O ), (O, S ), and (N, N ). On the other hand, (S, O ) risk
dominates (N, N ) because:{u1(S, O)芋u1(N, O)}{u2(S, O)芋u2(S, N)} 厩 (3－0)(2－0)＝6
瓜 {u1(N, N)芋u1(S, N)}{u2(N, N)芋u2(N, O)} 厩 (2－1)(2－0)＝2.
8

See, Harsanyi and Selten (1988).

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The Japanese Accounting Review, 3 (2013), 103-120

By a similar procedure, we find that (O, S ) also risk dominates (N, N ) and that there is no risk
dominance relationship between (S, O ) and (O, S ). ■A.2 Proof of Proposition 4

We denote a mixed strategy for player i by ói : Si 臆 [0, 1], which assigns to each purestrategy si 頴 Si a probability ói (si ) 噂 0. We also let ó 厩 (ó1, ó2). Note that a necessary andsufficient condition for mixed strategy profile ó to be a Nash equilibrium is that each player,
given the distribution of strategies played by his opponent, is indifferent among all the purestrategies that he plays with positive probability and that these pure strategies are at least as goodas any pure strategy he plays with zero probability.9
We focus on strictly mixed strategy equilibria and restrict the analysis to those that aresymmetrical. Suppose player 2 randomizes between “Stay ” and “Other.” That is, player 2 plays“Stay ” with probability q, “Other ” with probability (1－q), and “New ” with zero probability, i.e.,
ó2 厩 (q, 1－q, 0) where q 頴 (0, 1). Then, in a Nash equilibrium, player 2 must be indifferent
between “Stay ” and “Other,” and his expected payoff from playing “New ” must not exceed thatfrom playing “Stay ” or “Other.” Furthermore, player 1 best responds to player 2’s strategy. Player
1’s expected payoffs from playing “Stay,” “Other,” and “New ” are as follows:
Eu1 (S, ó2) 厩 1q＋3 (1－q)＝3－2q,
Eu1 (O, ó2) 厩 2q＋0 (1－q)＝2q,
Eu1 (N, ó2) 厩 0q＋0 (1－q)＝0,
where E is the expectation operator. When q＞3/4 (q＜3/4), player 1’s best response is to play
the pure strategy “Other ” (“Stay ”). However, if so, then player 2 cannot obtain the same expected
payoffs from playing “Stay ” and “Other,” violating the indifference condition above. In contrast,
if q＝3/4, then player 1 also plays “Stay ” and “Other ” with positive probabilities. Thus, given thesymmetrical structure of the game, we find that ó碓＝((3/4, 1/4, 0), (3/4, 1/4, 0)) is a candidate
for reaching Nash equilibrium.
To check whether the mixed strategy profile ó碓is a Nash equilibrium, we calculate player
i ’s expected payoffs given that player j plays the mixed strategy ój蔭
＝(3/4, 1/4, 0):
Eui (S, ój蔭) 厩 3－2 (3/4)＝3/2
Eui (O, ój蔭) 厩 2 (3/4)＝3/2
Eui (N, ój蔭) 厩 0.
Therefore, each player is indifferent between “Stay ” and “Other ” (played with positive
probabilities) and the expected payoff from playing “New ” (played with zero probability) is not
greater than that from playing “Stay ” and “Other.” Therefore, we conclude that the mixed
9

See Mas-Colell et al. (1999, Proposition 8.D.1, 250).

Taguchi, Ueeda, Miwa and Mizutani: Economic Consequences of Global Accounting Convergence:
An Experimental Study of a Coordination Game119

strategy profile ó碓＝((3/4, 1/4, 0), (3/4, 1/4, 0)) is a Nash equilibrium.
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10

A referee pointed out that two asymmetric equilibria exist in the base game, which are ((1/2, 0, 1/2), (0, 1/4, 3/4))
and ((0, 1/4, 3/4), (1/2, 0, 1/2)).

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