REPUTATION WITH ANALOGICAL REASONING

We consider a repeated interaction between a long-run player and a sequence of short-run players, in which the long-run player may either be rational or may be a mechanical type who plays the same (possibly mixed) action in every stage game. We depart from the classical model in assuming that the sh...

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Bibliographic Details
Published in:The Quarterly journal of economics 2012-11, Vol.127 (4), p.1927-1969
Main Authors: Jehiel, Philippe, Samuelson, Larry
Format: Article
Language:English
Subjects:
Ambivalence
Classical mechanics
Economics and Finance
Games
Humanities and Social Sciences
Nash equilibrium
Product choice
Rationality
Reasoning
Tax audits
Taxpaying
Theater
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Summary:We consider a repeated interaction between a long-run player and a sequence of short-run players, in which the long-run player may either be rational or may be a mechanical type who plays the same (possibly mixed) action in every stage game. We depart from the classical model in assuming that the short-run players make inferences by analogical reasoning, meaning that they correctly identify the average strategy of each type of long-run player, but do not recognize how this play varies across histories. Concentrating on 2 × 2 games, we provide a characterization of equilibrium payoffs, establishing a payoff bound for the rational long-run player that can be strictly larger than the familiar "Stackelberg" bound. We also provide a characterization of equilibrium behavior, showing that play begins with either a reputationbuilding or a reputation-spending stage (depending on parameters), followed by a reputation-manipulation stage.
ISSN:0033-5533
1531-4650
DOI:10.1093/qje/qjs031