CFDP 1821R3

Robust Predictions in Games with Incomplete Information

Author(s): 

Publication Date: September 2011

Revision Date: March 2013

Pages: 59

Abstract: 

We analyze games of incomplete information and offer equilibrium predictions which are valid for, and in this sense robust to, all possible private information structures that the agents may have. The set of outcomes that can arise in equilibrium for some information structure is equal to the set of Bayes correlated equilibria. We completely characterize the set of Bayes correlated equilibria in a class of games with quadratic payoffs and normally distributed uncertainty in terms of restrictions on the first and second moments of the equilibrium action-state distribution. We derive exact bounds on how prior knowledge about the private information refines the set of equilibrium predictions.

We consider information sharing among firms under demand uncertainty and find new optimal information policies via the Bayes correlated equilibria. We also reverse the perspective and investigate the identification problem under concerns for robustness to private information. The presence of private information leads to set rather than point identification of the structural parameters of the game.

Keywords: 

Incomplete information, Correlated equilibrium, Robustness to private information, Moments restrictions, Identification, Informations bounds, Linear best responses, Quadratic payoffs.

JEL Classification Codes:  C72, C73, D43, D83

See CFP: 1381