A Stochastic Stability Analysis with Observation Errors in Normal Form Games
38 Pages Posted: 16 Apr 2019 Last revised: 14 Jun 2021
Date Written: February 15, 2019
Abstract
We perform a stochastic stability analysis with observation errors. Players recurrently play a symmetric two-player normal form game with one another and respond to the strategy distribution of other players. In each period, a revising player observes the strategy distribution and chooses a best response to it. Her observation is perturbed with positive probability and she may respond to the misperceived strategy distribution. The robustness of Nash equilibria to such observation errors is examined. We find that only transition probabilities within states where no player plays any strictly dominated strategy matter for stochastic stability. A more precise set of stochastically stable states is characterized for several particular observation error models. For the local interaction model, the set of stochastically stable states is robust to addition of strategies that do not survive iterative elimination of strictly dominated strategies regardless of error types (action/observation) under certain conditions.
Keywords: Stochastic stability, Observation errors, Action errors, Local interactions, Iterative elimination of dominated strategies.
JEL Classification: C72, C73
Suggested Citation: Suggested Citation