Behavioral perfect equilibrium in Bayesian games

Elnaz Bajoori, Janos Flesch, Dries Vermeulen

Research output: Contribution to journalArticle

3 Citations (Scopus)
128 Downloads (Pure)

Abstract

We develop the notion of perfect Bayesian Nash Equilibrium—perfect BNE—in general Bayesian games. We test perfect BNE against the criteria laid out by Kohlberg and Mertens (1986). We show that, for a focal class of Bayesian games, perfect BNE exists. Moreover, when payoffs are continuous, perfect BNE is limit undominated for almost every type.

We illustrate the use of perfect BNE in the context of a second-price auction with interdependent values. Perfect BNE selects the unique pure strategy equilibrium in continuous strategies that separates types. Moreover, when valuations become independent, the equilibrium converges to the classical truthful dominant strategy equilibrium.

We also show that less intuitive equilibria in which types are pooled are ruled out by our selection criterion. We further argue that standard selection criteria for second-price auctions have no bite here. Bidders have no dominant strategies, and the separating equilibrium is not sincere.
Original languageEnglish
Pages (from-to)78–109
Number of pages32
JournalGames and Economic Behavior
Volume98
Early online date11 Jun 2016
DOIs
Publication statusPublished - 1 Jul 2016

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