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Structural Models of Nonequilibrium Strategic Thinking: Theory, Evidence, and Applications

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  • Vincent P. Crawford
  • Miguel A. Costa-Gomes
  • Nagore Iriberri

Abstract

Most applications of game theory assume equilibrium, justified by presuming either that learning will have converged to one, or that equilibrium approximates people's strategic thinking even when a learning justification is implausible. Yet several recent experimental and empirical studies suggest that people's initial responses to games often deviate systematically from equilibrium, and that structural nonequilibrium "level-k" or "cognitive hierarchy" models often out-predict equilibrium. Even when learning is possible and converges to equilibrium, such models allow better predictions of history-dependent limiting outcomes. This paper surveys recent theory and evidence on strategic thinking and illustrates the applications of level-k models in economics. (JEL C70, D03, D82, D83)

Suggested Citation

  • Vincent P. Crawford & Miguel A. Costa-Gomes & Nagore Iriberri, 2013. "Structural Models of Nonequilibrium Strategic Thinking: Theory, Evidence, and Applications," Journal of Economic Literature, American Economic Association, vol. 51(1), pages 5-62, March.
  • Handle: RePEc:aea:jeclit:v:51:y:2013:i:1:p:5-62
    Note: DOI: 10.1257/jel.51.1.5
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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