Incomplete Information, Dynamic Stability and the Evolution of Preferences: Two Examples

Abstract

We illustrate general techniques for assessing dynamic stability in games of incomplete information by re-analyzing two models of preference evolution, the Arce (2007) employer-worker game and the Friedman and Singh (2009) Noisy Trust game. The techniques include extensions of replicator and gradient dynamics, and for both models they confirm local stability of the key static equilibria. That is, we obtain convergence in time average for initial conditions sufficiently near equilibrium values.

Keywords: Stability, Perfect Bayesian Equilibrium, evolutionary dynamics

JEL Classification: C62, C73