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The Logit Equilibrium: A Perspective on Intuitive Behavioral Anomalies

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  • Simon P. Anderson

    ()
    (Department of Economics, University of Virginia)

  • Jacob K. Goeree

    ()
    (Department of Economics, University of Virginia)

  • Charles A. Holt

    ()
    (Department of Economics, University of Virginia)

Abstract

This paper considers a class of models in which rank-based payoffs are sensitive to “noise” in decision making. Examples include auctions, price competition, coordination, and location games. Observed laboratory behavior in these games is often responsive to the asymmetric costs associated with deviations from the Nash equilibrium. These payoff-asymmetry effects are incorporated in an approach that introduces noisy behavior via a logit probabilistic choice function. In the resulting logit equilibrium, behavior is characterized by a probability distribution that satisfies a “rational expectations” consistency condition: The beliefs that determine players' expected payoffs match the decision distributions that arise from applying the logit rule to those expected payoffs. We prove existence of a unique, symmetric logit equilibrium and derive comparative statics results. The paper provides a unified perspective on many recent laboratory studies of games in which Nash equilibrium predictions are inconsistent with both intuition and experimental evidence.

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Bibliographic Info

Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 69 (2002)
Issue (Month): 1 (July)
Pages: 21-47

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Handle: RePEc:sej:ancoec:v:69:1:y:2002:p:21-47

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  1. Jacob K. Goeree & Charles A. Holt & Susan K. Laury, 1999. "Altruism and Noisy Behavior in One-Shot Public Goods Experiments," Virginia Economics Online Papers 331, University of Virginia, Department of Economics.
  2. Charles A. Holt & Jacob K. Goeree, . "An Experimental Study of Costly Coordination," Virginia Economics Online Papers 326, University of Virginia, Department of Economics.
  3. Simon P. Anderson & Jacob K. Goeree & Charles A. Holt, 1998. "Rent Seeking with Bounded Rationality: An Analysis of the All-Pay Auction," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 106(4), pages 828-853, August.
  4. Dufwenberg, M. & Gneezy, U., 1998. "Price competition and market concentration: An experimental study," Discussion Paper, Tilburg University, Center for Economic Research 1998-27, Tilburg University, Center for Economic Research.
  5. Roth, Alvin E. & Erev, Ido, 1995. "Learning in extensive-form games: Experimental data and simple dynamic models in the intermediate term," Games and Economic Behavior, Elsevier, Elsevier, vol. 8(1), pages 164-212.
  6. Jacob K. Goeree & Charles A. Holt, . "Asymmetric Inequality Aversion and Noisy Behavior in Alternating-Offer Bargaining Games," Virginia Economics Online Papers 329, University of Virginia, Department of Economics.
  7. Glen W. Harrison & Jack Hirshleifer, 1998. "An experimental evaluation of weakest link/best shot models of public goods," Levine's Working Paper Archive 299, David K. Levine.
  8. McKelvey Richard D. & Palfrey Thomas R., 1995. "Quantal Response Equilibria for Normal Form Games," Games and Economic Behavior, Elsevier, Elsevier, vol. 10(1), pages 6-38, July.
  9. Drew Fudenberg & David K. Levine, 1998. "Learning in Games," Levine's Working Paper Archive 2222, David K. Levine.
  10. Basu, Kaushik, 1994. "The Traveler's Dilemma: Paradoxes of Rationality in Game Theory," American Economic Review, American Economic Association, American Economic Association, vol. 84(2), pages 391-95, May.
  11. Rosenthal, Robert W, 1989. "A Bounded-Rationality Approach to the Study of Noncooperative Games," International Journal of Game Theory, Springer, Springer, vol. 18(3), pages 273-91.
  12. Selten, Reinhard & Joachim Buchta, 1994. "Experimental Sealed Bid First Price Auctions with Directly Observed Bid Functions," Discussion Paper Serie B, University of Bonn, Germany 270, University of Bonn, Germany.
  13. C. Monica Capra, 1999. "Anomalous Behavior in a Traveler's Dilemma?," American Economic Review, American Economic Association, American Economic Association, vol. 89(3), pages 678-690, June.
  14. Richard Mckelvey & Thomas Palfrey, 1998. "Quantal Response Equilibria for Extensive Form Games," Experimental Economics, Springer, Springer, vol. 1(1), pages 9-41, June.
  15. Anderson, Simon P. & Goeree, Jacob K. & Holt, Charles A., 1998. "A theoretical analysis of altruism and decision error in public goods games," Journal of Public Economics, Elsevier, Elsevier, vol. 70(2), pages 297-323, November.
  16. Mookherjee Dilip & Sopher Barry, 1994. "Learning Behavior in an Experimental Matching Pennies Game," Games and Economic Behavior, Elsevier, Elsevier, vol. 7(1), pages 62-91, July.
  17. Charles A. Holt & Jacob K. Goeree, 1999. "Stochastic Game Theory: For Playing Games, Not Just for Doing Theory," Virginia Economics Online Papers 306, University of Virginia, Department of Economics.
  18. C. Monica Capra & Charles A. Holt, 1999. "Coordination," Southern Economic Journal, Southern Economic Association, Southern Economic Association, vol. 65(3), pages 630-636, January.
  19. Simon P. Anderson & Jacob K. Goeree & Charles A. Holt, 1999. "Stochastic Game Theory: Adjustment to Equilibrium Under Noisy Directional Learning," Virginia Economics Online Papers 327, University of Virginia, Department of Economics.
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