Journal Article

Robust Predictions in Infinite-Horizon Games—an Unrefinable Folk Theorem

Jonathan Weinstein and Muhamet Yildiz

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 80, issue 1, pages 365-394
Published in print January 2013 | ISSN: 0034-6527
Published online July 2012 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1093/restud/rds027
Robust Predictions in Infinite-Horizon Games—an Unrefinable Folk Theorem

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We show that in any game that is continuous at infinity, if a plan of action ai is played by a type ti in a Bayesian Nash equilibrium, then there are perturbations of ti for which ai is the only rationalizable plan and whose unique rationalizable belief regarding the play of the game is arbitrarily close to the equilibrium belief of ti. As an application to repeated games, we prove an unrefinable folk theorem: any individually rational and feasible payoff is the unique rationalizable payoff vector for some perturbed type profile. This is true even if perturbed types are restricted to believe that the repeated-game payoff structure and the discount factor are common knowledge.

Keywords: Robustness; Higher-order beliefs; Dynamic games; Folk Theorem; C72; C73

Journal Article.  17282 words.  Illustrated.

Subjects: Game Theory and Bargaining Theory

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