Impact of higher-order uncertainty
By: Jonathan Weinstein [and] Muhamet Yildiz
Contributors: Yildiz, Muhamet; Massachusetts Institute of Technology. Dept. of Economics
Series: Working paper series / Massachusetts Institute of Technology, Dept. of Economics -- working paper 03-14; Working paper (Massachusetts Institute of Technology. Dept. of Economics) -- no. 03-14.
Publisher: Massachusetts Institute of Technology, Dept. of Economics
Published: 2003
Place of publication: Cambridge, MA
Language: eng
Number of pages: 37
Description: In some games, the impact of higher-order uncertainty is very large, implying that present economic theories may be misleading as these theories assume common knowledge of the type structure after specifying the first or the second orders of beliefs. Focusing on normal-form games in which the players' strategy spaces are compact metric spaces, we show that our key condition, called "global stability under uncertainty," implies a variety of results to the effect that the impact of higher-order uncertainty is small. Our central result states that, under global stability, the maximum change in equilibrium strategies due to changes in players' beliefs at orders higher than k is exponentially decreasing in k. Therefore, given any need for precision, we can approximate equilibrium strategies by specifying only finitely many orders of beliefs. Keywords: Higher-order Uncertainty, Stability, Incomplete Information, Equilibrium. JEL Classification: C72, C73.
Notes: "March 2003." -- "Date: First version: October, 2002; this version: March, 2003."--P. 1.

Includes bibliographical references (p. 36-37).

Abstract in HTML and working paper for download in PDF available via World Wide Web at the Social Science Research Network.