Nash equilibrium under knightian uncertainty: breaking-down backward induction

James Dow and Sergio Werlang

No 186, FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) from EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil)

Abstract: We present two alternative definitions of Nash equilibrium for two person games in the presence af uncertainty, in the sense of Knight. We use the formalization of uncertainty due to Schmeidler and Gilboa. We show that, with one of the definitions, prudent behaviour (maxmin) can be obtained as an outcome even when it is not rationalizable in the usual sense. Most striking is that with the Same definition we break down backward induction in the twice repeated prisoner's dilemma. We also link these results with the Kreps-Milgrom-Roberts-Wilson explanation of cooperation in the finitely repeated prisoner's dilemma.

Date: 1992-02
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Journal Article: Nash Equilibrium under Knightian Uncertainty: Breaking Down Backward Induction (1994)
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Persistent link: https://EconPapers.repec.org/RePEc:fgv:epgewp:186

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