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Impact of higher-order uncertainty

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Author Info
Muhamet Yildiz
Jonathan Weinsten

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Abstract

In some games, the impact of higher-order uncertainty is very large, implying that present economic theories may be misleading as these theories assume common knowledge of the type structure after specifying the first or the second orders of beliefs. Focusing on normal-form games in which the players' strategy spaces are compact metric spaces, we show that our key condition, called "global stability under uncertainty," implies a variety of results to the effect that the impact of higher-order uncertainty is small. Our central result states that, under global stability, the maximum change in equilibrium strategies due to changes in players' beliefs at orders higher than k is exponentially decreasing in k. Therefore, given any need for precision, we can approximate equilibrium strategies by specifying only finitely many orders of beliefs

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Paper provided by Econometric Society in its series Econometric Society 2004 North American Winter Meetings with number 157.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nawm04:157

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Related research
Keywords: higher-order uncertainty; robustness of equilibrium; stability;

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Find related papers by JEL classification:
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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