AbstractThere is evidence that people do not fully take into account how other people's actions depend on these other people's information. This paper defines and applies a new equilibrium concept in games with private information, cursed equilibrium, which assumes that each player correctly predicts the distribution of other players' actions, but underestimates the degree to which these actions are correlated with other players' information. We apply the concept to common-values auctions, where cursed equilibrium captures the widely observed phenomenon of the winner's curse, and to bilateral trade, where cursedness predicts trade in adverse-selections settings for which conventional analysis predicts no trade. We also apply cursed equilibrium to voting and signalling models. We test a single-parameter variant of our model that embeds Bayesian Nash equilibrium as a special case and find that parameter values that correspond to cursedness fit a broad range of experimental datasets better than the parameter value that corresponds to Bayesian Nash equilibrium. Copyright The Econometric Society 2005.
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Bibliographic InfoArticle provided by Econometric Society in its journal Econometrica.
Volume (Year): 73 (2005)
Issue (Month): 5 (09)
Other versions of this item:
- Eyster, Erik & Rabin, Matthew, 2002. "Cursed Equilibrium," Department of Economics, Working Paper Series qt7p2911dn, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Eyster, Erik & Rabin, Matt, 2002. "Cursed Equilibrium," Department of Economics, Working Paper Series qt6xf4782t, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Erik Eyster & Matt Rabin, 2003. "Cursed Equilibrium," Method and Hist of Econ Thought 0303002, EconWPA.
- B49 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Other
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