Testing Equilibrium Multiplicity in Dynamic Games

39 Pages Posted: 30 Sep 2014

See all articles by Taisuke Otsu

Taisuke Otsu

Yale University - Cowles Foundation

Martin Pesendorfer

London School of Economics & Political Science (LSE); Centre for Economic Policy Research (CEPR)

Yuya Takahashi

University of Washington

Date Written: August 2014

Abstract

This paper proposes several statistical tests for finite state Markov games to examine the null hypothesis that the data are generated from a single equilibrium. We formulate tests of (i) the conditional choice and state transition probabilities, (ii) the steady-state distribution, and (iii) the conditional state distribution given an initial state. In a Monte Carlo study we find that the test based on the steady-state distribution performs well and has high power even with small numbers of markets and time periods. We apply the tests to the empirical study of Ryan (2012) that analyzes dynamics of the U.S. Portland Cement industry and assess if his assumption of single equilibrium is supported by the data.

Keywords: dynamic Markov game, hypothesis testing, multiplicity of equilibria

JEL Classification: C12, C72, D44

Suggested Citation

Otsu, Taisuke and Pesendorfer, Martin and Takahashi, Yuya, Testing Equilibrium Multiplicity in Dynamic Games (August 2014). CEPR Discussion Paper No. DP10111, Available at SSRN: https://ssrn.com/abstract=2501583

Taisuke Otsu (Contact Author)

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States

Martin Pesendorfer

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
+44 20 7955 6783 (Phone)
+44 20 7831 1840 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Yuya Takahashi

University of Washington ( email )

Seattle, WA 98195
United States

HOME PAGE: http://https://econ.washington.edu/people/yuya-takahashi

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