24 Pages Posted: 3 Jan 2017
Date Written: January 1, 2017
We can often predict the behavior of those closest to us more accurately than that of complete strangers, yet we routinely engage in strategic situations with both. Peer-confirming equilibrium describes the behavioral consequences of this intuition in a non-cooperative game. We augment a game with a network to represent strategic information: if two players are linked in the network, they have correct conjectures about each others' strategies. In peer-confirming equilibrium, there is common belief that players (i) behave rationally and (ii) correctly anticipate neighbors' play. In static games, adding links to the network always restricts the set of outcomes, but in dynamic games, the outcome set can be non-monotonic in the network as the behavior of well-connected players reduces others' strategic uncertainty. This solution concept offers alternative explanations for observed over-bidding in all-pay auctions and delineates the possible sources of miscoordination in protests and coups.
Keywords: game theory, networks, conjectural equilibrium
JEL Classification: D01, C72, D85, D74
Suggested Citation: Suggested Citation