Rational Inattention Dynamics in Stochastic Games: Coordination and Conditioning

19 Pages Posted: 19 Apr 2021

See all articles by Pantelis Karapanagiotis

Pantelis Karapanagiotis

EBS Business School; Leibniz Institute for Financial Research SAFE

Date Written: April 17, 2021

Abstract

Decision-makers that choose information strategies instead of concrete actions elect stochastic choice rules that leave open the potential for errors, which can obfuscate the strategic interactions of players. This article establishes that dynamic, stochastic, games with rationally inattentive agents have Nash equilibria in which players coordinate their choice rules. When these choice rules are compliant with the predisposition of players towards particular actions, the Nash equilibria can be expressed in terms of dynamic logit rules. This result reduces finding Nash equilibria of this type to establishing a joint distribution of actions and states that accommodates the optimal behavior of all players. Logit rule Nash equilibria are used to study an example of strategic coordination, and an example of a zero-sum, strategic conflict game with sequential moves. The resulting equilibria of the second example involve strategies that exhibit conditioning characteristics and can be relevant for applications in principal-agent problems.

Keywords: Rational inattention, stochastic games, dynamic logit, Nash equilibria, choice rules, information acquisition

JEL Classification: C71, C72, C73, D82, D83, D91

Suggested Citation

Karapanagiotis, Pantelis, Rational Inattention Dynamics in Stochastic Games: Coordination and Conditioning (April 17, 2021). Available at SSRN: https://ssrn.com/abstract=3828381 or http://dx.doi.org/10.2139/ssrn.3828381

Pantelis Karapanagiotis (Contact Author)

EBS Business School ( email )

Gustav-Stresemann-Ring 3
65189 Wiesbaden, Hessen
Germany

Leibniz Institute for Financial Research SAFE ( email )

House of Finance
Theodor-W.-Adorno-Platz 3
Frankfurt, 60323
Germany

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