Equilibrium Selection in Auctions and High Stakes Games
AbstractWe introduce the test-set equilibrium refinement of Nash equilibrium and apply it
to three well-known auction games, comparing our findings to similar ones previously
obtained by ad hoc equilibrium selections. We also introduce a theory of high stakes
versions of games, in which strategies are first proposed and then subjected to a potentially
costly review-and-revise process. For finite games, when the cost of revising strategies
is small, a Nash equilibrium is a test-set equilibrium if and only if those strategies are
chosen for play in a quasi*-perfect equilibrium of the corresponding high stakes version.