Nash Equilibrium under Knightian Uncertainty: Breaking Down Backward Induction
AbstractWe present two alternative definitions of Nash equilibrium for two person gamesin the presence af uncertainty, in the sense of Knight. We use the formalization ofuncertainty 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.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Theory.
Volume (Year): 64 (1994)
Issue (Month): 2 (December)
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Web page: http://www.elsevier.com/locate/inca/622869
Other versions of this item:
- Dow, James & Werlang, Sérgio Ribeiro da Costa, 1992. "Nash equilibrium under knightian uncertainty: breaking-down backward induction," Economics Working Papers (Ensaios Economicos da EPGE) 186, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
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