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Journal of Economic Literature: Vol. 51 No. 1 (March 2013)

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

Article Citation

Crawford, Vincent P., Miguel A. Costa-Gomes, and Nagore Iriberri. 2013. "Structural Models of Nonequilibrium Strategic Thinking: Theory, Evidence, and Applications." Journal of Economic Literature, 51(1): 5-62.

DOI: 10.1257/jel.51.1.5

Abstract

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)

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Authors

Crawford, Vincent P. (All Souls College, U Oxford and U CA, San Diego)
Costa-Gomes, Miguel A. (U St Andrews)
Iriberri, Nagore (U Basque Country and Pompeu Fabra U)

JEL Classifications

C70: Game Theory and Bargaining Theory: General
D03: Behavioral Economics: Underlying Principles
D82: Asymmetric and Private Information; Mechanism Design
D83: Search; Learning; Information and Knowledge; Communication; Belief


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