42 Pages Posted: 11 May 2006
Date Written: February 2006
We define a refinement of Nash equilibria called metastability. This refinement supposes that the given game might be embedded within any global game that leaves its local bestreply correspondence unaffected. A selected set of equilibria is metastable if it is robust against perturbations of every such global game; viz., every sufficiently small perturbation of the best-reply correspondence of each global game has an equilibrium that projects arbitrarily near the selected set. Metastability satisfies the standard decision-theoretic axioms obtained by Mertens' (1989) refinement (the strongest proposed refinement), and it satisfies the projection property in Mertens' small-worlds axiom: a metastable set of a global game projects to a metastable set of a local game. But the converse is slightly weaker than Mertens' decomposition property: a metastable set of a local game contains a metastable set that is the projection of a metastable set of a global game. This is inevitable given our demonstration that metastability is equivalent to a strong form of homotopic essentiality. Mertens' definition invokes homological essentiality whereas we derive homotopic essentiality from primitives (robustness for every embedding). We argue that this weak version of decomposition has a natural gametheoretic interpretation.
Keywords: economic theory, game theory
JEL Classification: C72
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