Strong Forward Induction

Abstract

Forward induction, as defined by Govindan and Wilson (2009), places a local dominance condition on off-equilibrium path beliefs restricting relevant strategies for an equilibrium outcome to be infinitely more likely than irrelevant ones. Meanwhile, it places no global dominance restrictions and thus leaves open the possibility that a dominated strategy is deemed more likely than strategies dominating it. This paper defines strong forward induction that improves upon forward induction by placing a global dominance condition on the lexicographical beliefs in addition to the local dominance condition. In some games strong forward induction can eliminate implausible outcomes that forward induction and an iterative procedure based on it fail to eliminate.

Keywords: forward induction, lexicographical belief system, equilibrium refinement

JEL Classification: C72