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Backward Induction and Model Deterioration

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  • Squintani Francesco

    (University College London)

Abstract

The issue of how players' model of a game may evolves over time is largely unexplored. We formalize this issue for games with perfect information, and show that small-probability model deterioration may upset the complete-model backward induction solution, possibly yielding a Pareto-improving long run distribution of play. We derive necessary and sufficient conditions for the robustness of backward induction. These conditions can be interpreted with a forward-induction logic, and are shown to be closely related to the requirements for asymptotic stability of the backward induction path under standard evolutionary dynamics.

Suggested Citation

  • Squintani Francesco, 2004. "Backward Induction and Model Deterioration," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 4(1), pages 1-36, December.
  • Handle: RePEc:bpj:bejtec:v:advances.4:y:2004:i:1:n:2
    DOI: 10.2202/1534-5963.1157
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    JEL classification:

    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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