Download This PaperBridging Level-K to Nash Equilibrium
33 Pages Posted: 18 Mar 2017 Last revised: 6 Apr 2020
Date Written: March 25, 2019
Abstract
We propose a new solution concept, NLK, that connects Nash Equilibrium (NE) and Level-K. It allows a player in a game to believe that her opponent may be either less or as sophisticated as, she is a view with support in psychology. We apply it to data from four published papers on static, dynamic and auction games. NLK provides different predictions than those of NE and Level-K. Moreover, a simple version of it explains the experimental data better in many cases. We discuss extensions to games with more than two players and heterogeneous beliefs.
Keywords: Nash Equilibrium, Level-k, bounded rationality
JEL Classification: D01, C72, C92
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