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Communication Equilibria and Bounded Rationality

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  • Nikhil Vellodi

    (University of Warwick)

Abstract

In this paper, we generalize the notion of a communication equilibrium (Forges 1986, Myerson 1986) of a game with incomplete information by introducing two new types of correlation device, namely extended and Bayesian devices. These new devices explicitly model the `thinking process' of the device, i.e. the manner in which it generates outputs conditional on inputs. We proceed to endow these devices with both information processing errors, in the form of non-partitional information, and multiple transition and prior distributions, and prove that these two properties are equivalent in this context, thereby generalizing the result of Brandenburger, Dekel and Geanakoplos (1988). We proceed to discuss the Revelation Principle for each device, and conclude by nesting a certain class of `cheap-talk' equilibria of the underlying game within Bayesian communication equilibria. These so-called fallible talk equilibria cannot be generated by standard communication equilibria.

Suggested Citation

  • Nikhil Vellodi, 2010. "Communication Equilibria and Bounded Rationality," The Warwick Economics Research Paper Series (TWERPS) 955, University of Warwick, Department of Economics.
  • Handle: RePEc:wrk:warwec:955
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    File URL: https://warwick.ac.uk/fac/soc/economics/research/workingpapers/2010/twerp_955.pdf
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    References listed on IDEAS

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    1. Samet, Dov, 1990. "Ignoring ignorance and agreeing to disagree," Journal of Economic Theory, Elsevier, vol. 52(1), pages 190-207, October.
    2. Lehrer, Ehud, 1996. "Mediated Talk," International Journal of Game Theory, Springer;Game Theory Society, vol. 25(2), pages 177-188.
    3. Shapley, Lloyd S. & Shubik, Martin, 1969. "On market games," Journal of Economic Theory, Elsevier, vol. 1(1), pages 9-25, June.
    4. Forges, Francoise M, 1986. "An Approach to Communication Equilibria," Econometrica, Econometric Society, vol. 54(6), pages 1375-1385, November.
    5. Françoise Forges, 1990. "Equilibria with Communication in a Job Market Example," The Quarterly Journal of Economics, Oxford University Press, vol. 105(2), pages 375-398.
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