Inference of Signs of Interaction Effects in Simultaneous Games with Incomplete Information - Second Version

48 Pages Posted: 2 Jul 2010

See all articles by Aureo de Paula

Aureo de Paula

University College London - Department of Economics; Getulio Vargas Foundation (FGV) - Sao Paulo School of Economics

Xun Tang

University of Pennsylvania - Department of Economics

Date Written: June 29, 2010

Abstract

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

de Paula, Aureo and Tang, Xun, Inference of Signs of Interaction Effects in Simultaneous Games with Incomplete Information - Second Version (June 29, 2010). PIER Working Paper No. 10-021. Available at SSRN: https://ssrn.com/abstract=1632977 or http://dx.doi.org/10.2139/ssrn.1632977

Aureo De Paula (Contact Author)

University College London - Department of Economics ( email )

Gower Street
London WC1E 6BT, WC1E 6BT
United Kingdom

Getulio Vargas Foundation (FGV) - Sao Paulo School of Economics

Rua Itapeva 474 s.1202
São Paulo, São Paulo 01332-000
Brazil

Xun Tang

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-7409 (Phone)
215-573-2057 (Fax)

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