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Level-k analysis of experimental centipede games
Affiliation:1. Bank of Canada, 234 Wellington Street Ottawa, ON K1A 0G9, Canada;2. Department of Economics, Krannert School of Management, Purdue University, 100 South Grant Street, West Lafayette, IN 47907, USA;1. Department of Economics, University of Haifa, Abba Khoushy Ave 199, Haifa 3498838 Israel;2. Department of Economics, University of Exeter, Exeter, EX4 4PU, UK;3. Department of Economics, Wilfrid Laurier University, 75 University Ave. W., Waterloo, ON N2L 3C5 Canada;4. Department of Economics and Business Administration, Ariel University, Ariel 40700, Israel
Abstract:As one of the best-known examples of the paradox of backward induction, centipede games have prompted a host of studies with various approaches and explanations (McKelvey and Palfrey, 1992, Fey et al., 1996, Nagel and Tang, 1998, Rapoport et al., 2003, Palacios-Huerta and Volij, 2009). Focusing on initial plays observed in experiments, this paper attempts to offer another explanation based on thorough study of level-k models as applied to these games. Borrowing ideas from the cognitive hierarchy model (Camerer et al., 2004), the authors constructed a group of models based on levels of rationality, and also tested for various assumptions on the play of the most naïve player type in these models. It was found that level-k models generally perform better than the agent quantal response equilibrium (AQRE) model and its variant with altruistic player types for increasing-pie centipede games, while the AQRE model with altruistic player types performs better in constant-pie games.
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