Impact of Higher-Order Uncertainty
38 Pages Posted: 14 Apr 2003
Date Written: March 2003
In some games, the impact of higher-order uncertainty is very large, implying that present economic theories may be misleading as these theories assume common knowledge of the type structure after specifying the first or the second orders of beliefs. Focusing on normal-form games in which the players' strategy spaces are compact metric spaces, we show that our key condition, called "global stability under uncertainty," implies a variety of results to the effect that the impact of higher-order uncertainty is small. Our central result states that, under global stability, the maximum change in equilibrium strategies due to changes in players' beliefs at orders higher than k is exponentially decreasing in k. Therefore, given any need for precision, we can approximate equilibrium strategies by specifying only finitely many orders of beliefs.
Keywords: Higher-order Uncertainty, Stability, Incomplete Information, Equilibrium
JEL Classification: C72, C73
Suggested Citation: Suggested Citation