Are Equilibrium Strategies Unaffected by Incentives?

Jack Hirshleifer and Eric Rasmusen

Journal of Theoretical Politics, 1992, vol. 4, issue 3, 353-367

Abstract: In a mixed-strategy Nash equilibrium, changing one player's payoffs affects only the other player's equilibrium strategy mix. This `Payoff Irrelevance Proposition' (PIP) appears to undercut the main foundations of economic policy analysis since, allegedly, equilibrium behavior will not respond to changes in incentives. We show, in contrast, that: (1) When the policy-maker has the first move in a sequential-move game, the PIP does not hold. (2) Even in a simultaneous-move game, the PIP holds only when the policy space is discrete, and for sufficiently small payoff revisions. Thus, incentives do generally affect behavior in equilibrium.

Keywords: game theory; incentives and payoffs; mixed strategies; the Police Game (search for similar items in EconPapers)
Date: 1992
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Working Paper: Are Equilibrium Strategies Unaffected by Incentives (1990)
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Persistent link: https://EconPapers.repec.org/RePEc:sae:jothpo:v:4:y:1992:i:3:p:353-367

DOI: 10.1177/0951692892004003007

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