Paper #1287

Title:

Quotient spaces of boundedly rational types

Authors:

Davide Cianciaruso and Fabrizio Germano

Date:

September 2011

Abstract:

By identifying types whose low-order beliefs – up to level li – about the state of nature coincide, we obtain quotient type spaces that are typically smaller than the original ones, preserve basic topological properties, and allow standard equilibrium analysis even under bounded reasoning. Our Bayesian Nash (li; l-i)-equilibria capture players’ inability to distinguish types belonging to the same equivalence class. The case with uncertainty about the vector of levels (li; l-i) is also analyzed. Two examples illustrate the constructions.

Keywords:

Incomplete-information games, high-order reasoning, type space, quotient space, hierarchies of beliefs, bounded rationality

JEL codes:

C72, D03, D83

Area of Research:

Microeconomics

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