Strategic uncertainty and equilibrium selection in discontinuous games
Journal of Economic Theory, 2019, vol. 183, issue C, 786-822
We introduce the new concept of prudent equilibrium to model strategic uncertainty, and prove it exists in large classes of discontinuous games. When the game is better-reply secure, we show that prudent equilibrium refines Nash equilibrium. In contrast with the current literature, we don't use probabilities to model players' strategies and beliefs about other players' strategies. We provide examples (first-price auctions, location game, Nash demand game, etc.) where prudent equilibrium concept removes most non-intuitive solutions of the game.
Keywords: Prudent equilibrium; Nash equilibrium; Refinement; Strategic uncertainty; Better-reply secure; Discontinuous games (search for similar items in EconPapers)
JEL-codes: C02 C62 C72 L13 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:183:y:2019:i:c:p:786-822
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