Finite Depth of Reasoning and Equilibrium Play in Games with Incomplete Information

Willemien Kets

Discussion Papers from Northwestern University, Center for Mathematical Studies in Economics and Management Science

Abstract: The standard framework for analyzing games with incomplete information models players as if they have an infinite depth of reasoning, which is not always consistent with experimental evidence. This paper generalizes the type spaces of Harsanyi (1967- 1968) so that players can have a nite depth of reasoning. We do this restricting the set of events that a player of a finite depth can reason about. This approach allows us to extend the Bayesian-Nash equilibrium concept to environments with players with a nite depth of reasoning. We demonstrate that the standard approach of modeling beliefs with Harsanyi type spaces fails to capture the equilibrium behavior of players with a nite depth, at least in some games. Consequently, the standard approach cannot be used to describe the equilibrium behavior of players with a finite depth in general.

Keywords: Bounded rationality; higher-order beliefs; finite depth of reasoning; games with incomplete information; Bayesian-Nash equilibrium JEL Classification: C700; C720; D800; D830 (search for similar items in EconPapers)
Date: 2014-02-07
New Economics Papers: this item is included in nep-cta, nep-gth and nep-mic
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Citations: View citations in EconPapers (4)

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