Estimation of Finite Sequential Games

46 Pages Posted: 25 Oct 2010 Last revised: 18 Sep 2012

Date Written: April 15, 2012

Abstract

I study the estimation of finite sequential games with perfect information. The major challenge in estimation is computation of high-dimensional truncated integration whose domain is complicated by strategic interaction. I show that this complication resolves when unobserved off-the-equilibrium-path strategies are controlled for. Separately evaluating the likelihood contribution of each subgame perfect strategy profile that rationalizes the observed outcome allows the use of the GHK simulator, the most widely used importance-sampling probit simulator. Monte Carlo experiments demonstrate the performance and robustness of the proposed method, and confirm that misspecification of the decision order leads to underestimation of strategic effect.

Keywords: Inference In Discrete Games, Sequential Games, Monte Carlo Integration, GHK Simulator, Subgame Perfection, Perfect Information

JEL Classification: C35, C63, C72

Suggested Citation

Maruyama, Shiko, Estimation of Finite Sequential Games (April 15, 2012). UNSW Australian School of Business Research Paper No. 2010 ECON 22, Available at SSRN: https://ssrn.com/abstract=1697083 or http://dx.doi.org/10.2139/ssrn.1697083

Shiko Maruyama (Contact Author)

Jinan University ( email )

601 West Whampoa Road
Tianhe District
Guangzhou, 510632
China

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