Structural Models of Nonequilibrium Strategic Thinking: Theory, Evidence, and Applications

Vincent P. Crawford*, Miguel Costa-Gomes, Nagore Iriberri

*Corresponding author for this work

    Research output: Contribution to journalArticlepeer-review

    Abstract

    Most applications of game theory assume equilibrium, justified by presuming either that learning will have converged to one, or that equilibrium approximates people's strategic thinking even when a learning justification is implausible. Yet several recent experimental and empirical studies suggest that people's initial responses to games often deviate systematically from equilibrium, and that structural nonequilibrium "level-k" or "cognitive hierarchy" models often out-predict equilibrium. Even when learning is possible and converges to equilibrium, such models allow better predictions of history-dependent limiting outcomes. This paper surveys recent theory and evidence on strategic thinking and illustrates the applications of level-k models in economics. (JEL C70, D03, D82, D83)

    Original languageEnglish
    Pages (from-to)5-62
    Number of pages58
    JournalJournal of Economic Literature
    Volume51
    Issue number1
    DOIs
    Publication statusPublished - Mar 2013

    Keywords

    • PRIVATE-VALUE AUCTIONS
    • QUANTAL RESPONSE EQUILIBRIUM
    • COORDINATION GAMES
    • NORMAL-FORM GAMES
    • COMMON KNOWLEDGE
    • CHEAP-TALK
    • GUESSING GAMES
    • WINNERS CURSE
    • INFORMATION-TRANSMISSION
    • BOUNDED RATIONALITY

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