Compromise, don't optimize: Generalizing perfect Bayesian equilibrium to allow for ambiguity

Karl H. Schlag, Andriy Zapechelnyuk

Research output: Contribution to journalArticlepeer-review

Abstract / Description of output

We introduce a solution concept for extensive-form games of incomplete information in which players can have multiple priors. Players’ choices are based on the notions of complaints and compromises. Complaints come from hypothetical assessors who have different priors and evaluate the choices of the players. Compromises are choices that aim to make these complaints small. The resulting solution concept is called perfect compromise equilibrium and generalizes perfect Bayesian equilibrium. We use this concept to provide insights into how ambiguity influences Cournot and Bertrand markets, public good provision, markets for lemons, job market signaling, bilateral trade with common value, and forecasting.
Original languageEnglish
Number of pages52
JournalJournal of Political Economy Microeconomics
Early online date18 Jan 2024
DOIs
Publication statusE-pub ahead of print - 18 Jan 2024

Keywords / Materials (for Non-textual outputs)

  • compromise
  • multiple priors
  • loss
  • robustness
  • perfect Bayesian equilibrium
  • perfect compromise equilibrium
  • solution concept
  • ambiguity

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