Cognitive Hierarchies in Multi-Stage Games of Incomplete Information: Theory and Experiment
Sequential equilibrium is the conventional approach for analyzing multi-stage games of incomplete information. It relies on mutual consistency of beliefs. To relax mutual consistency, I theoretically and experimentally explore the dynamic cognitive hierarchy (DCH) solution. One property of DCH is th...
Saved in:
Published in | arXiv.org |
---|---|
Main Author | |
Format | Paper |
Language | English |
Published |
Ithaca
Cornell University Library, arXiv.org
02.11.2023
|
Subjects | |
Online Access | Get full text |
Cover
Loading…
Summary: | Sequential equilibrium is the conventional approach for analyzing multi-stage games of incomplete information. It relies on mutual consistency of beliefs. To relax mutual consistency, I theoretically and experimentally explore the dynamic cognitive hierarchy (DCH) solution. One property of DCH is that the solution can vary between two different games sharing the same reduced normal form, i.e., violation of invariance under strategic equivalence. I test this prediction in a laboratory experiment using two strategically equivalent versions of the dirty-faces game. The game parameters are calibrated to maximize the expected difference in behavior between the two versions, as predicted by DCH. The experimental results indicate significant differences in behavior between the two versions, and more importantly, the observed differences align with DCH. This suggests that implementing a dynamic game experiment in reduced normal form (using the "strategy method") could lead to distortions in behavior. |
---|---|
ISSN: | 2331-8422 |