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Are Equilibrium Strategies Unaffected by Incentives

  • Jack Hirshleifer

    (UCLA)

  • Eric Rasmusen

    (UCLA)

In a mixed-strategy Nash equilibrium, changing one player's payoffs affects only the other player's equilibrium strategy mix. This `Payoff Irrelevance Proposition' (PIP) appears to undercut the main foundations of economic policy analysis since, allegedly, equilibrium behavior will not respond to changes in incentives. We show, in contrast, that: (1) When the policy-maker has the first move in a sequential-move game, the PIP does not hold. (2) Even in a simultaneous-move game, the PIP holds only when the policy space is discrete, and for sufficiently small payoff revisions. Thus, incentives do generally affect behavior in equilibrium.

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File URL: http://www.econ.ucla.edu/workingpapers/wp595.pdf
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Paper provided by UCLA Department of Economics in its series UCLA Economics Working Papers with number 595.

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Date of creation: 01 Aug 1990
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Handle: RePEc:cla:uclawp:595
Contact details of provider: Web page: http://www.econ.ucla.edu/

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  1. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  2. Ehrlich, Isaac, 1973. "Participation in Illegitimate Activities: A Theoretical and Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 521-65, May-June.
  3. Gary S. Becker, 1968. "Crime and Punishment: An Economic Approach," Journal of Political Economy, University of Chicago Press, vol. 76, pages 169.
  4. George Tsebelis, 1990. "Are Sanctions Effective?," Journal of Conflict Resolution, Peace Science Society (International), vol. 34(1), pages 3-28, March.
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