Mixed Equilibrium: When Burning Money is Rational
We discuss the rationality of burning money behavior from a new perspective: the mixed Nash equilibrium. We support our argument analyzing the first-order derivatives of the mixed equilibrium expected utility of the players with respect to their own utility payoffs in a 2x2 normal form game. We establish necessary and sufficient conditions that guarantee the existence of negative derivatives. In particular, games with negative derivatives are the ones that create incentives for burning money behavior since such behavior in these games improves the player’s mixed equilibrium expected utility. We show that a negative derivative for the mixed equilibrium expected utility of a given player i occurs if, and only if, he has a strict preference for one of the strategies of the other player. Moreover, negative derivatives always occur when they are taken with respect to player i’s highest and lowest game utility payoffs.
|Date of creation:||10 Feb 2012|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Huck, Steffen & Muller, Wieland, 2005.
"Burning money and (pseudo) first-mover advantages: an experimental study on forward induction,"
Games and Economic Behavior,
Elsevier, vol. 51(1), pages 109-127, April.
- Huck, S. & Müller, W., 2005. "Burning money and (pseudo) first-mover advantages : An experimental study on forward induction," Other publications TiSEM 572509ab-51a9-4b52-837d-0, Tilburg University, School of Economics and Management.
- Engelmann, Dirk & Steiner, Jakub, 2007. "The effects of risk preferences in mixed-strategy equilibria of 2x2 games," Games and Economic Behavior, Elsevier, vol. 60(2), pages 381-388, August.
- Ben-Porath, Elchanan & Dekel, Eddie, 1992. "Signaling future actions and the potential for sacrifice," Journal of Economic Theory, Elsevier, vol. 57(1), pages 36-51.
- Hans Gersbach, 2004. "The money-burning refinement: With an application to a political signalling game," International Journal of Game Theory, Springer;Game Theory Society, vol. 33(1), pages 67-87, January.
- van Damme, Eric, 1989.
"Stable equilibria and forward induction,"
Journal of Economic Theory,
Elsevier, vol. 48(2), pages 476-496, August.
- Stalnaker, Robert, 1998. "Belief revision in games: forward and backward induction1," Mathematical Social Sciences, Elsevier, vol. 36(1), pages 31-56, July.
- Ken Binmore, 1994. "Game Theory and the Social Contract, Volume 1: Playing Fair," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262023636, September.
- Brandts, Jordi & Holt, Charles A., 1995. "Limitations of dominance and forward induction: Experimental evidence," Economics Letters, Elsevier, vol. 49(4), pages 391-395, October.
- Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, September.
- John C. Harsanyi & Reinhard Selten, 1988. "A General Theory of Equilibrium Selection in Games," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262582384, September.
- Makoto Shimoji, 2002. "On forward induction in money-burning games," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 19(3), pages 637-648.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:43410. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter)
If references are entirely missing, you can add them using this form.