Compromise, Don’t Optimize: Generalizing Perfect Bayesian Equilibrium to Allow for Ambiguity

Karl Schlag and Andriy Zapechelnyuk

Journal of Political Economy Microeconomics, 2024, vol. 2, issue 1, 77 - 128

Abstract: We introduce a solution concept for extensive form games of incomplete information in which players can have multiple priors. Players’ choices are based on the notions of complaints and compromises. Complaints come from hypothetical assessors who have different priors and evaluate the choices of the players. Compromises are choices that aim to make these complaints small. The resulting solution concept is called perfect compromise equilibrium and generalizes perfect Bayesian equilibrium. We use this concept to provide insights into how ambiguity influences Cournot and Bertrand markets, public good provision, markets for lemons, job market signaling, bilateral trade with common value, and forecasting.

Date: 2024
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Working Paper: Compromise, Don't Optimize: Generalizing Perfect Bayesian Equilibrium to Allow for Ambiguity (2021)
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