On the Strategic Impact of an Event under Non-Common Priors
28 Pages Posted: 3 Jul 2007
Date Written: July 3, 2007
This paper studies the impact of a small probability event on strategic behavior in incomplete information games with non-common priors. It is shown that the global impact of a small probability event (i.e., its propensity to affect strategic behavior at all states in the state space) has an upper bound that is an increasing function of a measure of discrepancy from the common prior assumption. In particular, its global impact can be arbitrarily large under non-common priors, but is bounded from above under common priors. These results quantify the different implications common prior and non-common prior models have on the (infinite) hierarchies of beliefs.
Keywords: common prior assumption, higher order belief, rationalizability, contagion, belief potential
JEL Classification: C72, D82
Suggested Citation: Suggested Citation