Rational conjectures and evolutionary beliefs in public goods games

Matthew McGinty

Journal of Public Economic Theory, 2021, vol. 23, issue 6, 1130-1143

Abstract: This paper applies conjectural variations (CVs) to a model of public good provision and shows that CVs are superior to Nash beliefs. In addition to imposing consistency, as Bresnahan, I show that consistent conjectures (CCs) are obtained from individual payoff maximization. CCs emerge as the unique subgame perfect Nash equilibrium (NE) in a two‐stage game in which beliefs are chosen in Stage 1 and quantities in Stage 2. There is an individual payoff advantage to non‐Nash behavior, generating a Prisoner's Dilemma in conjectures in addition to the usual free‐rider problem associated with public goods. The correct and payoff maximizing conjecture is the unique equilibrium in an evolutionary framework against a player with Nash conjectures. The consistent conjecture equilibrium is the unique evolutionary equilibrium when both players conjectures evolve. Hence, the NE prediction is too optimistic when players have rational conjectures.

Date: 2021
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