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The Logit Equilibrium: A Perspective on Intuitive Behavioral Anomalies
Author(s) -
Anderson Simon P.,
Goeree Jacob K.,
Holt Charles A.
Publication year - 2002
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.1002/j.2325-8012.2002.tb00476.x
Subject(s) - mathematical economics , logit , nash equilibrium , symmetric equilibrium , common value auction , economics , comparative statics , stochastic game , econometrics , mathematics , equilibrium selection , game theory , repeated game , microeconomics
This paper considers a class of models in which rank‐based payoffs are sensitive to “noise” in decision making. Examples include auctions, price competition, coordination, and location games. Observed laboratory behavior in these games is often responsive to the asymmetric costs associated with deviations from the Nash equilibrium. These payoff‐asymmetry effects are incorporated in an approach that introduces noisy behavior via a logit probabilistic choice function. In the resulting logit equilibrium, behavior is characterized by a probability distribution that satisfies a “rational expectations” consistency condition: The beliefs that determine players' expected payoffs match the decision distributions that arise from applying the logit rule to those expected payoffs. We prove existence of a unique, symmetric logit equilibrium and derive comparative statics results. The paper provides a unified perspective on many recent laboratory studies of games in which Nash equilibrium predictions are inconsistent with both intuition and experimental evidence.