Bridging Level-K to Nash Equilibrium

Dan Levin and Luyao Zhang
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Dan Levin: Ohio State University
Luyao Zhang: Duke Kunshan University

The Review of Economics and Statistics, 2022, vol. 104, issue 6, 1329-1340

Abstract: We introduce NLK, a model that connects the Nash equilibrium (NE) and level-k. It allows a player in a game to believe that her opponent may be either less or as sophisticated as she is, a view supported in psychology. We apply NLK to data from five published papers on static, dynamic, and auction games. NLK provides different predictions from those of the NE and level-k; moreover, a simple version of NLK explains the experimental data better in many cases, with the same or fewer parameters. We discuss extensions to games with more than two players and heterogeneous beliefs.

Date: 2022
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