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Are Equilibrium Strategies Unaffected by Incentives


  • Jack Hirshleifer


  • Eric Rasmusen



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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  • Jack Hirshleifer & Eric Rasmusen, 1990. "Are Equilibrium Strategies Unaffected by Incentives," UCLA Economics Working Papers 595, UCLA Department of Economics.
  • Handle: RePEc:cla:uclawp:595

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    References listed on IDEAS

    1. Gary S. Becker, 1974. "Crime and Punishment: An Economic Approach," NBER Chapters,in: Essays in the Economics of Crime and Punishment, pages 1-54 National Bureau of Economic Research, Inc.
    2. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
    3. repec:cup:apsrev:v:83:y:1989:i:01:p:77-91_08 is not listed on IDEAS
    4. repec:cup:apsrev:v:84:y:1990:i:02:p:569-586_19 is not listed on IDEAS
    5. Ehrlich, Isaac, 1973. "Participation in Illegitimate Activities: A Theoretical and Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 521-565, May-June.
    6. 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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    Cited by:

    1. Pradiptyo, Rimawan, 2011. "A Certain Uncertainty; Assessment of Court Decisions in Tackling Corruption in Indonesia," MPRA Paper 36382, University Library of Munich, Germany.

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