Testing Equilibrium Multiplicity in Dynamic Games

Martin Pesendorfer, Yuya Takahashi and Taisuke Otsu

No 10111, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper proposes several statistical tests for finite state Markov games to examine the null hypothesis that the data are generated from a single equilibrium. We formulate tests of (i) the conditional choice and state transition probabilities, (ii) the steady-state distribution, and (iii) the conditional state distribution given an initial state. In a Monte Carlo study we find that the test based on the steady-state distribution performs well and has high power even with small numbers of markets and time periods. We apply the tests to the empirical study of Ryan (2012) that analyzes dynamics of the U.S. Portland Cement industry and assess if his assumption of single equilibrium is supported by the data.

Keywords: Dynamic markov game; Multiplicity of equilibria; Hypothesis testing (search for similar items in EconPapers)
JEL-codes: C12 C72 D44 (search for similar items in EconPapers)
Date: 2014-08
New Economics Papers: this item is included in nep-ecm and nep-ore
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