Inference of Signs of Interaction Effects in Simultaneous Games with Incomplete Information - Second Version
48 Pages Posted: 2 Jul 2010
Date Written: June 29, 2010
This paper studies the inference of interaction effects, i.e., the impacts of players' actions on each other's payoffs, in discrete simultaneous games with incomplete information. We propose an easily implementable test for the signs of state-dependent interaction effects that does not require parametric specifications of players' payoffs, the distributions of their private signals or the equilibrium selection mechanism. The test relies on the commonly invoked assumption that players' private signals are independent conditional on observed states. The procedure is valid in the presence of multiple equilibria, and, as a by-product of our approach, we propose a formal test for multiple equilibria in the data-generating process. We provide Monte Carlo evidence of the test's good performance infinite samples. We also implement the test to infer the direction of interaction effects in couples' joint retirement decisions using data from the Health and Retirement Study.
Keywords: identification, inference, multiple equilibria, incomplete information games
JEL Classification: C01, C72
Suggested Citation: Suggested Citation