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Cursed Equilibrium
Author(s) -
Eyster Erik,
Rabin Matthew
Publication year - 2005
Publication title -
econometrica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 16.7
H-Index - 199
eISSN - 1468-0262
pISSN - 0012-9682
DOI - 10.1111/j.1468-0262.2005.00631.x
Subject(s) - winner's curse , sequential equilibrium , mathematical economics , common value auction , bayesian game , nash equilibrium , economics , curse , equilibrium selection , value (mathematics) , econometrics , symmetric equilibrium , range (aeronautics) , bayesian probability , general equilibrium theory , mathematics , microeconomics , statistics , game theory , repeated game , materials science , sociology , anthropology , composite material
There is evidence that people do not fully take into account how other people's actions depend on these other people's information. This paper defines and applies a new equilibrium concept in games with private information, cursed equilibrium , which assumes that each player correctly predicts the distribution of other players' actions, but underestimates the degree to which these actions are correlated with other players' information. We apply the concept to common‐values auctions, where cursed equilibrium captures the widely observed phenomenon of the winner's curse, and to bilateral trade, where cursedness predicts trade in adverse‐selections settings for which conventional analysis predicts no trade. We also apply cursed equilibrium to voting and signalling models. We test a single‐parameter variant of our model that embeds Bayesian Nash equilibrium as a special case and find that parameter values that correspond to cursedness fit a broad range of experimental datasets better than the parameter value that corresponds to Bayesian Nash equilibrium.