 Learning and equilibrium transitions: Stochastic stability in discounted stochastic fictitious playJournal of Economic Dynamics and Control, 2022, vol. 145, issue C Abstract: In this paper I study how adaptive learning leads to switches between multiple stable equilibria, and I develop tools to characterize the rate of transition. While the methods I develop are relatively general, I focus on a two-player model of stochastic fictitious play, where agents’ payoffs are subject to random shocks. Each player forecasts his opponent’s future play as a discounted average of past play. I analyze the behavior of agents’ beliefs as the discount rate on past information becomes small, but the payoff shock variance remains fixed. I show that agents tend to be drawn toward an equilibrium, but occasionally the stochastic shocks lead to endogenous shifts between equilibria. I then calculate the limiting transition rates and the invariant distribution of players’ beliefs, and use it to determine the most likely outcome observed in long run. I show this stochastically stable equilibrium satisfies an important continuity condition which allows for relatively direct characterization. Keywords: Bounded rationality; Adaptive learning; Equilibrium selection (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:145:y:2022:i:c:s0165188922002706 DOI: 10.1016/j.jedc.2022.104567 Access Statistics for this article Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok More articles in Journal of Economic Dynamics and Control from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.