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An Experiment on Forward versus Backward Induction: How Fairness and Levels of Reasoning Matter

Author

Listed:
  • Dieter Balkenborg

    (Department of Economics, University of Exeter)

  • Rosemarie Nagel

    (Department of Economics, Universitat Pompeiu Fabra)

Abstract

We report the experimental results on a game with an outside option where induction contradicts with background induction based on a focal, risk dominant equilibrium. The latter procedure yields the equilibrium selected by Harsanyi and Selton's (1888) theory, which is hence here in contradiction with strategic stability (Kohlberg-Mertens (1985)). We find the Harsanyi-Selton solution to be in much better agreement with our data. Since fairness and bounded rationality seem to matter we discuss whether recent behavioral theories, in particular fairness theories and learning, might explain our findings. The fairness theories by Fehr and Schmidt (1999), Bolton and Ockenfels (2000), when calibrated using experimental data on dictator- and ultimatum games, indeed predict that forward induction should play no role for our experiment and that the outside option should be chosen by all sufficiently selfish players. However, there is a multiplicity of "fairness equilibra", some of which seem to be rejected because they require too many levels of reasoning"

Suggested Citation

  • Dieter Balkenborg & Rosemarie Nagel, 2008. "An Experiment on Forward versus Backward Induction: How Fairness and Levels of Reasoning Matter," Discussion Papers 0804, Exeter University, Department of Economics.
  • Handle: RePEc:exe:wpaper:0804
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    File URL: http://people.exeter.ac.uk/cc371/RePEc/dpapers/DP0804.pdf
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    References listed on IDEAS

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    Cited by:

    1. Mürüvvet Büyükboyacı & Serkan Küçükşenel, 2017. "Costly Pre‐Play Communication and Coordination in Stag‐Hunt Games," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 38(6), pages 845-856, September.
    2. Chlaß, Nadine & Perea, Andrés, 2016. "How do people reason in dynamic games?," Annual Conference 2016 (Augsburg): Demographic Change 145881, Verein für Socialpolitik / German Economic Association.

    More about this item

    Keywords

    experiments; equilibrium selection; forward induction; fairness; levels of reasoning.;

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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