Common Priors Under Endogenous Uncertainty

15 Pages Posted: 5 Sep 2020

See all articles by Pierfrancesco Guarino

Pierfrancesco Guarino

University of Verona - Department of Economics

Elias Tsakas

Maastricht University - Department of Economics

Date Written: July 23, 2020

Abstract


For a fixed game and a type structure that admits a common prior, Action Independence states that the conditional beliefs induced by the common prior do not depend on the player’s own strategy. It has been conjectured that Action Independence can be behaviorally characterized by means of a suitable no-betting condition (Dekel & Siniscalchi, 2015), but whether this is indeed the case remains an open problem. In this paper, we prove this conjecture true by focusing on strategy-invariant bets, which are bets that cannot be manipulated by the players. In particular, first we show that at least one of the common priors satisfies Action Independence if and only if there exists no mutually acceptable strategy-invariant bet among the players. Second we show that, all common priors satisfy Action Independence if and only if there exists no mutually acceptable strategy-invariant bet among the players and an outside observer. These results allow us a deeper understanding of existing foundations of solution concepts using only epistemic conditions that are expressed in terms of type structures and are therefore elicitable.

Keywords: Common Prior, No-Betting Condition, Endogenous Uncertainty, Action Independence, Strategy-Invariant Bets.

JEL Classification: C70, D82

Suggested Citation

Guarino, Pierfrancesco and Tsakas, Elias, Common Priors Under Endogenous Uncertainty (July 23, 2020). Available at SSRN: https://ssrn.com/abstract=3659295 or http://dx.doi.org/10.2139/ssrn.3659295

Pierfrancesco Guarino

University of Verona - Department of Economics ( email )

Verona
Italy

Elias Tsakas (Contact Author)

Maastricht University - Department of Economics ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

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