Non-Parametric Identification and Testing of Quantal Response Equilibrium

Johannes Hoelzemann, Ryan Webb and Erhao Xie

Staff Working Papers from Bank of Canada

Abstract: We study the falsifiability and identification of Quantal Response Equilibrium (QRE) when each player’s utility and error distribution are relaxed to be unknown non-parametric functions. Using variations of players’ choices across a series of games, we first show that both the utility function and the distribution of errors are non-parametrically over-identified. This result further suggests a straightforward testing procedure for QRE that achieves the desired type-1 error and maintains a small type-2 error. To apply this methodology, we conduct an experimental study of the matching pennies game. Our non-parametric estimates strongly reject the conventional logit choice probability. Moreover, when the utility and the error distribution are sufficiently flexible and heterogeneous, the quantal response hypothesis cannot be rejected for 70% of participants. However, strong assumptions such as risk neutrality, logistically distributed errors and homogeneity lead to substantially higher rejection rates.

Keywords: Econometric and statistical methods; Economic models (search for similar items in EconPapers)
JEL-codes: C14 C57 C92 (search for similar items in EconPapers)
Pages: 92 pages
Date: 2024-06
New Economics Papers: this item is included in nep-dcm, nep-ecm and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:24-24

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