Mixed Equilibrium: When Burning Money is Rational
AbstractWe discuss the rationality of burning money behavior from a new perspective: the mixed Nash equilibrium. We support our argument analyzing the first-order derivatives of the mixed equilibrium expected utility of the players with respect to their own utility payoffs in a 2x2 normal form game. We establish necessary and sufficient conditions that guarantee the existence of negative derivatives. In particular, games with negative derivatives are the ones that create incentives for burning money behavior since such behavior in these games improves the player’s mixed equilibrium expected utility. We show that a negative derivative for the mixed equilibrium expected utility of a given player i occurs if, and only if, he has a strict preference for one of the strategies of the other player. Moreover, negative derivatives always occur when they are taken with respect to player i’s highest and lowest game utility payoffs.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 43410.
Date of creation: 10 Feb 2012
Date of revision:
Mixed Nash Equilibrium; Burning Money; Collaborative Dominance; Security Dilemma;
Find related papers by JEL classification:
- C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-01-12 (All new papers)
- NEP-EXP-2013-01-12 (Experimental Economics)
- NEP-GTH-2013-01-12 (Game Theory)
- NEP-HPE-2013-01-12 (History & Philosophy of Economics)
- NEP-MIC-2013-01-12 (Microeconomics)
- NEP-UPT-2013-01-12 (Utility Models & Prospect Theory)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- van Damme,Eric, 1987.
"Stable equilibria and forward induction,"
Discussion Paper Serie A
128, University of Bonn, Germany.
- Stalnaker, Robert, 1998. "Belief revision in games: forward and backward induction1," Mathematical Social Sciences, Elsevier, vol. 36(1), pages 31-56, July.
- John C. Harsanyi & Reinhard Selten, 1988. "A General Theory of Equilibrium Selection in Games," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262582384, December.
- Makoto Shimoji, 2002. "On forward induction in money-burning games," Economic Theory, Springer, vol. 19(3), pages 637-648.
- Hans Gersbach, 2004. "The money-burning refinement: With an application to a political signalling game," International Journal of Game Theory, Springer, vol. 33(1), pages 67-87, January.
- Huck, Steffen & Muller, Wieland, 2005.
"Burning money and (pseudo) first-mover advantages: an experimental study on forward induction,"
Games and Economic Behavior,
Elsevier, vol. 51(1), pages 109-127, April.
- Huck, S. & Müller, W., 2005. "Burning money and (pseudo) first-mover advantages: An experimental study on forward induction," Open Access publications from Tilburg University urn:nbn:nl:ui:12-171348, Tilburg University.
- Engelmann, Dirk & Steiner, Jakub, 2007. "The effects of risk preferences in mixed-strategy equilibria of 2x2 games," Games and Economic Behavior, Elsevier, vol. 60(2), pages 381-388, August.
- Ken Binmore, 1994. "Game Theory and the Social Contract, Volume 1: Playing Fair," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262023636, December.
- Brandts, Jordi & Holt, Charles A., 1995. "Limitations of dominance and forward induction: Experimental evidence," Economics Letters, Elsevier, vol. 49(4), pages 391-395, October.
- Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, December.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.