Reference-dependent preferences, super-dominance and stochastic stability

Ryoji Sawa and Jiabin Wu ()

Journal of Mathematical Economics, 2018, vol. 78, issue C, 96-104

Abstract: This paper investigates stochastic stability of noisy best response dynamics with reference-dependent preferences. We define a strategy as super-dominant in a 2 × 2 coordination game if it is the maximin strategy in terms of monetary returns and the state that all players play it constitutes an equilibrium which Pareto-dominates all other equilibria. If such a strategy exists, the corresponding equilibrium, which we call the super-dominant equilibrium, is uniquely stochastically stable for the BRM choice rule (the best response choice rule with uniform random errors) given any model of reference-dependent preferences. However, for any 2 × 2 coordination game with a super-dominant strategy, there exists a model of reference-dependent preferences with which the super-dominant equilibrium fails to be stochastically stable for the logit choice rule.

Keywords: Equilibrium selection; Stochastic stability; Reference-dependent preferences; Loss-aversion; Maximin; Payoff-dominance (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:78:y:2018:i:c:p:96-104

DOI: 10.1016/j.jmateco.2018.08.002

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