Paper #1326

Title:

Approximate knowledge of rationality and correlated equilibria

Authors:

Fabrizio Germano and Peio Zuazo-Garin

Date:

June 2012 (Revised: October 2012)

Abstract:

We extend Aumann's [3] theorem, deriving correlated equilibria as a consequence of common priors and common knowledge of rationality, by explicitly allowing for non-rational behavior. We replace the assumption of common knowledge of rationality with a substantially weaker one, joint p-belief of rationality, where agents believe the other agents are rational with probabilities p = (pi)i?I or more. We show that behavior in this case constitutes a type of correlated equilibrium satisfying certain p-belief constraints, and that it varies continuously in the parameters p and, for p sufficiently close to one, with high probability is supported on strategies that survive the iterated elimination of strictly dominated strategies. Finally, we extend the analysis to characterizing rational expectations of interim types, to games of incomplete information, as well as to the case of non-common priors.

Keywords:

Approximate common knowledge, bounded rationality, p-rational belief system, correlated equilibrium, incomplete information, non-cooperative game.

JEL codes:

C72, D82, D83

Area of Research:

Microeconomics

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