Forward induction reasoning and correct beliefs
Journal of Economic Theory, 2017, vol. 169, issue C, 489-516
All equilibrium concepts implicitly make a correct beliefs assumption, stating that a player believes that his opponents are correct about his first-order beliefs. In this paper we show that in many dynamic games of interest, this correct beliefs assumption may be incompatible with a very basic form of forward induction reasoning: the first two layers of extensive-form rationalizability (Pearce, 1984; Battigalli, 1997, epistemically characterized by Battigalli and Siniscalchi, 2002). Hence, forward induction reasoning naturally leads us away from equilibrium reasoning. In the second part we classify the games for which equilibrium reasoning is consistent with this type of forward induction reasoning, and find that this class is very small.
Keywords: Epistemic game theory; Dynamic games; Forward induction; Common strong belief in rationality; Correct beliefs assumption; Equilibrium (search for similar items in EconPapers)
JEL-codes: C72 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:169:y:2017:i:c:p:489-516
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