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Unawareness, Beliefs and Games

  • Burkhard C. Schipper
  • Aviad Heifetz
  • Martin Meier

    (Department of Economics, University of California Davis)

We define a generalized state-space model with interactive unawareness and probabilistic beliefs. Such models are desirable for many potential applications of asymmetric unawareness. We develop Bayesian games with unawareness, define equilibrium, and prove existence. We show how equilibria are extended naturally from lower to higher awareness levels and restricted from higher to lower awareness levels. We use our unawareness belief structure to show that the common prior assumption is too weak to rule out speculative trade in all states. Yet, we prove a generalized ``No-trade'' theorem according to which there can not be common certainty of strict preference to trade. Moreover, we show a generalization of the ``No-agreeing-to-disagree'' theorem.

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Paper provided by University of California, Davis, Department of Economics in its series Working Papers with number 73.

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Length: 44
Date of creation: 01 Mar 2007
Date of revision:
Handle: RePEc:cda:wpaper:07-3
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  1. Aviad Heifetz & Martin Meier & Burkhard C. Schipper, 2007. "Unawareness, Beliefs and Games," Bonn Econ Discussion Papers bgse6_2007, University of Bonn, Germany.
  2. Feinberg, Yossi, 2000. "Characterizing Common Priors in the Form of Posteriors," Journal of Economic Theory, Elsevier, vol. 91(2), pages 127-179, April.
  3. Monderer, Dov & Samet, Dov, 1989. "Approximating common knowledge with common beliefs," Games and Economic Behavior, Elsevier, vol. 1(2), pages 170-190, June.
  4. Eddie Dekel & Barton L. Lipman & Aldo Rustichini, 1998. "Standard State-Space Models Preclude Unawareness," Econometrica, Econometric Society, vol. 66(1), pages 159-174, January.
  5. Heifetz, Aviad, 2006. "The positive foundation of the common prior assumption," Games and Economic Behavior, Elsevier, vol. 56(1), pages 105-120, July.
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