Structural Models of Nonequilibrium Strategic Thinking: Theory, Evidence, and Applications

Vincent P. Crawford; Miguel A. Costa-Gomes; Nagore Iriberri

doi:10.1257/jel.51.1.5

Structural Models of Nonequilibrium Strategic Thinking: Theory, Evidence, and Applications

Vincent P. Crawford¹; Miguel A. Costa-Gomes²; Nagore Iriberri³

¹ University of Oxford, All Souls College, Oxford, and University of California, San Diego. · ² University of St Andrews · ³ University of the Basque Country UPV/EHU, IKERBASQUE, Universitat Pompeu Fabra, and Barcelona Graduate School of Economics.

Journal of Economic Literature 2013

Most applications of game theory assume equilibrium, justified by presuming either that learning will have converged to one, or that equilibrium approximates people's strategic thinking even when a learning justification is implausible. Yet several recent experimental and empirical studies suggest that people's initial responses to games often deviate systematically from equilibrium, and that structural nonequilibrium “level-k” or “cognitive hierarchy” models often out-predict equilibrium. Even when learning is possible and converges to equilibrium, such models allow better predictions of history-dependent limiting outcomes. This paper surveys recent theory and evidence on strategic thinking and illustrates the applications of level-k models in economics. (JEL C70, D03, D82, D83)

DOI: 10.1257/jel.51.1.5
Volume: 51 (1)
Pages: 5-62
Language: en
Export: BibTeX
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