Online Concealed Correlation and Bounded Rationality
AbstractCorrelation of players' actions may evolve in the common course of the play of a repeated game with perfect monitoring (``obline correlation''). In this paper we study the concealment of such correlation from a boundedly rational player. We show that ``strong'' players, i.e., players whose strategic complexity is less stringently bounded, can orchestrate the obline correlation of the actions of ``weak'' players, where this correlation is concealed from an opponent of ``intermediate'' strength. The feasibility of such ``\ol concealed correlation'' is reflected in the individually rational payoff of the opponent and in the equilibrium payoffs of the repeated game. This result enables the derivation of a folk theorem that characterizes the set of equilibrium payoffs in a class of repeated games with boundedly rational players and a mechanism designer who sends public signals. The result is illustrated in two models, each of which captures a different aspect of bounded rationality. In the first, players use bounded recall strategies. In the second, players use strategies that are implementable by finite automata.
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Bibliographic InfoPaper provided by The Center for the Study of Rationality, Hebrew University, Jerusalem in its series Discussion Paper Series with number dp659.
Length: 46 pages
Date of creation: Feb 2014
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-04-11 (All new papers)
- NEP-CTA-2014-04-11 (Contract Theory & Applications)
- NEP-GER-2014-04-11 (German Papers)
- NEP-GTH-2014-04-11 (Game Theory)
- NEP-HPE-2014-04-11 (History & Philosophy of Economics)
- NEP-MIC-2014-04-11 (Microeconomics)
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