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Forward induction reasoning and correct beliefs

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  • Perea, Andrés

Abstract

All equilibrium concepts implicitly make a correct beliefs assumption, stating that a player believes that his opponents are correct about his first-order beliefs. In this paper we show that in many dynamic games of interest, this correct beliefs assumption may be incompatible with a very basic form of forward induction reasoning: the first two layers of extensive-form rationalizability (Pearce, 1984; Battigalli, 1997, epistemically characterized by Battigalli and Siniscalchi, 2002). Hence, forward induction reasoning naturally leads us away from equilibrium reasoning. In the second part we classify the games for which equilibrium reasoning is consistent with this type of forward induction reasoning, and find that this class is very small.

Suggested Citation

  • Perea, Andrés, 2017. "Forward induction reasoning and correct beliefs," Journal of Economic Theory, Elsevier, vol. 169(C), pages 489-516.
  • Handle: RePEc:eee:jetheo:v:169:y:2017:i:c:p:489-516
    DOI: 10.1016/j.jet.2017.02.013
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    References listed on IDEAS

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    Keywords

    Epistemic game theory; Dynamic games; Forward induction; Common strong belief in rationality; Correct beliefs assumption; Equilibrium;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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