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On Forward Induction

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  • Srihari Govindan
  • Robert Wilson

Abstract

We examine Hillas and Kohlberg's conjecture that invariance to the addition of payoff-redundant strategies implies that a backward induction outcome survives deletion of strategies that are inferior replies to all equilibria with the same outcome. That is, invariance and backward induction imply forward induction. Although it suffices in simple games to interpret backward induction as a subgame-perfect or sequential equilibrium, to obtain general theorems we use a quasi-perfect equilibrium, viz. a sequential equilibrium in strategies that are admissible continuations from each information set. Using this version of backward induction, we prove the Hillas-Kohlberg conjecture for two-player extensive-form games with perfect recall. We also prove an analogous theorem for general games by interpreting backward induction as a proper equilibrium, since a proper equilibrium is equivalent to a quasi-perfect equilibrium of each extensive form with the same normal form, provided beliefs are justifed by perturbations invariant to inessential transformations of the extensive form. For a two-player game we prove that if a set of equilibria includes a proper equilibrium of every game with the same reduced normal form then it satisfies forward induction, i.e. it includes a proper equilibrium of the game after deleting strategies that are inferior replies to all equilibria in the set. We invoke slightly stronger versions of invariance and properness to handle nonlinearities in an N-player game.

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Paper provided by David K. Levine in its series Levine's Working Paper Archive with number 321307000000000618.

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Date of creation: 06 Dec 2006
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Handle: RePEc:cla:levarc:321307000000000618

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Citations

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Cited by:
  1. Srihari Govindan & Robert Wilson, 2009. "On Forward Induction," Econometrica, Econometric Society, vol. 77(1), pages 1-28, 01.
  2. Srihari Govindan & Robert Wilson, 2010. "Axiomatic Equilibrium Selection For Generic Two-Player Games," Levine's Working Paper Archive 661465000000000203, David K. Levine.
  3. Govindan, Srihari & Wilson, Robert B., 2005. "Justification of Stable Equilibria," Research Papers 1896, Stanford University, Graduate School of Business.
  4. Roman Inderst & Sebastian Pfeil, 2013. "Securitization and Compensation in Financial Institutions," Review of Finance, European Finance Association, vol. 17(4), pages 1323-1364.
  5. Govindan, Srihari & Wilson, Robert B., 2008. "Decision-Theoretic Forward Induction," Research Papers 1986, Stanford University, Graduate School of Business.
  6. Heller, Yuval & Winter, Eyal, 2013. "Rule Rationality," MPRA Paper 48746, University Library of Munich, Germany.
  7. Oikonomou, V.K. & Jost, J, 2013. "Periodic strategies and rationalizability in perfect information 2-Player strategic form games," MPRA Paper 48117, University Library of Munich, Germany.
  8. Srihari Govindan & Robert Wilson, 2008. "Axiomatic Theory of Equilibrium Selection in Signalling Games with Generic Payoffs," Levine's Working Paper Archive 122247000000002381, David K. Levine.

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