Conferences at Department of Economics, University of Toronto, Canadian Economic Theory Conference 2010

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Admissibility and Event-Rationality

Paulo Barelli*, Spyros Galanis

Date: 2010-05-21 10:45 am – 11:15 am
Last modified: 2010-05-17

Abstract


Brandenburger et al (2008) establish epistemic foundations for admissibility, or the avoidance of weakly dominated strategies,  by using lexicographic type structures and the notion of rationality and common assumption of rationality (RCAR). Their negative result that RCAR is empty whenever the type structure is complete and continuous suggests that iterated admissibility (IA) requires players to have prior knowledge about each other, and therefore is a strong solution concept, not at the same level as iterated elimination of strongly dominated strategies (IEDS). We follow an alternative approach, using standard type structures and the notion of event-rationality. We characterize the set of strategies that are generated under event-rationality and common belief of event-rationality (RCBER) and show that, in a complete structure, it consists of the strategies that are admissible and survive iterated elimination of dominated strategies. By requiring that agents believe that themselves are E-rational at each level of mutual belief we construct and characterize RCBeER and show that in a complete structure it generates the IA strategies. Contrary to the negative result in
Brandenburger et. at. (2008), we show that RCBER and RCBeER are nonempty in complete, continuous and compact type structures, therefore providing an epistemic criterion for IA.

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