Belief and higher-order belief in the centipede games: An experimental investigation

This paper experimentally explores the epistemic conditions behind people's non-equilibrium behaviour in the centipede games. We propose a novel design of laboratory experiment to elicit people's first- and second-order beliefs regarding their opponents' choices and beliefs. The measured beliefs, together with the choice data, help us to estimate people's level of rationality, belief of rationality and second-order belief of rationality. To examine how these epistemic variables are affected by the social-efficiency property of the classic increasing-sum centipede game, we revisit the constant-sum centipede and compare the measured epistemic conditions from the constant-sum with those from the classic centipede. We find that people's non-backward induction behaviour may be attributed to the diffusion of beliefs and higher-order beliefs in the increasing-sum centipede. We consider a behavioural model in which people's preferences for social efficiency are incorporated into the extended utility maximization problem. Our analytical and estimation results indicate that the presence of efficiency-oriented players and people's belief towards the uncertain portion of such type of players may play a part in the non-backward-induction outcomes in experimental centipede games.