Finite State Dynamic Games with Asymmetric Information: A Computational Framework

48 Pages Posted: 29 Jul 2004

See all articles by Chaim Fershtman

Chaim Fershtman

Tel Aviv University - Eitan Berglas School of Economics; Tinbergen Institute

Ariel Pakes

National Bureau of Economic Research (NBER); Harvard University - Department of Economics

Date Written: August 2004

Abstract

We present a simple algorithm for computing an intuitive notion of MPE for finite state dynamic games with asymmetric information. The algorithm does not require: storage and updating of posterior distributions, explicit integration over possible future states to determine continuation values, or storage and updating of information at all possible points in the state space. It is also easy to program. To illustrate we compute the MPE of a collusive industry in which firms do not know each other's cost positions. Costs evolve with the (privately observed) outcomes of their investment decisions. Costly meetings are called when a firm perceives that its relative cost position has improved. The meetings reveal information and realign profits according. We show that parameters determining information flows can effect market structure and through market structure, producer and consumer surplus.

Keywords: Dynamic Games, Asymmetric Information, Cartel, Numerical Analysis

JEL Classification: C73, C72, L13, L40

Suggested Citation

Fershtman, Chaim and Pakes, Ariel, Finite State Dynamic Games with Asymmetric Information: A Computational Framework (August 2004). Harvard Institute of Economic Research Discussion Paper No. 2041. Available at SSRN: https://ssrn.com/abstract=570085 or http://dx.doi.org/10.2139/ssrn.570085

Chaim Fershtman

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel
+972 3 640 7167 (Phone)
+972 3 640 9908 (Fax)

Tinbergen Institute ( email )

Burg. Oudlaan 50
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Netherlands

Ariel Pakes (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Harvard University - Department of Economics ( email )

Littauer Center
Room 117
Cambridge, MA 02138
United States
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617-495-8570 (Fax)

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