Regular Quantal Response Equilibrium |
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Authors: | Jacob K Goeree Charles A Holt Thomas R Palfrey |
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Institution: | (1) Division of the Humanities and Social Sciences, California Institute of Technology, Mail code 228-77, Pasadena, CA 91125, USA;(2) Department of Economics, University of Virginia, Charlottesville, VA 22904-4182, USA;(3) Department of Economics, Princeton University, 112 Fisher Hall, Princeton, NJ 08540, USA |
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Abstract: | The structural Quantal Response Equilibrium (QRE) generalizes the Nash equilibrium by augmenting payoffs with random elements
that are not removed in some limit. This approach has been widely used both as a theoretical framework to study comparative
statics of games and as an econometric framework to analyze experimental and field data. The framework of structural QRE is
flexible: it can be applied to arbitrary finite games and incorporate very general error structures. Restrictions on the error
structure are needed, however, to place testable restrictions on the data (Haile et al., 2004). This paper proposes a reduced-form
approach, based on quantal response functions that replace the best-response functions underlying the Nash equilibrium. We
define a regular QRE as a fixed point of quantal response functions that satisfies four axioms: continuity, interiority, responsiveness, and
monotonicity. We show that these conditions are not vacuous and demonstrate with an example that they imply economically sensible
restrictions on data consistent with laboratory observations. The reduced-form approach allows for a richer set of regular
quantal response functions, which has proven useful for estimation purposes.
JEL Classification: D62, C73 |
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Keywords: | quantal response equilibrium discrete choice models reduced-form approach |
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