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Inference of Signs of Interaction Effects in Simultaneous Games with Incomplete Information

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  • Xun Tang

    (University of Pennsylvania)

  • Aureo de Paula

    (University of Pennsylvania)

Abstract

This paper studies the inference of interaction effects, i.e. the impacts of players' actions on each other's payoffs, in discrete simultaneous games with incomplete information. We propose an easily implementable test for the signs of state-dependent interaction effects which does not require parametric specifications of players' payoffs, the distributions of their private signals or the equilibrium selection mechanism. The test relies on the commonly invoked assumption that players' private signals are independent conditional on observed states. The procedure is valid in the presence of multiple equilibria and as a by-product we propose a formal test for multiple equilibria in the data-generating process. We provide Monte Carlo evidence of the test's good performance in finite samples. We also implement it to infer the direction of interaction effects in couples' joint retirement decisions using data from the Health and Retirement Study.

Suggested Citation

  • Xun Tang & Aureo de Paula, 2010. "Inference of Signs of Interaction Effects in Simultaneous Games with Incomplete Information," 2010 Meeting Papers 1087, Society for Economic Dynamics.
  • Handle: RePEc:red:sed010:1087
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    More about this item

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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