The structural Quantal Response Equilibrium (QRE) generalizes the Nash equilibrium by augmenting payoffs with random elements that are not removed in some limit. This approach has been widely used both as a theoretical framework to study comparative statics of games and as an econometric framework to analyze experimental and field data. The framework of structural QRE is flexible: it can be applied to arbitrary finite games and incorporate very general error structures. Restrictions on the error structure are needed, however, to place testable restrictions on the data (Haile et al., 2004). This paper proposes a reduced-form approach, based on quantal response functions that replace the best-response functions underlying the Nash equilibrium. We define a {\em regular} QRE as a fixed point of quantal response functions that satisfies four axioms: continuity, interiority, responsiveness, and monotonicity. We show that these conditions are not vacuous and demonstrate with an example that they imply economically sensible restrictions on data consistent with laboratory observations. The reduced-form approach allows for a richer set of regular quantal response functions, which has proven useful for estimation purposes.
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Paper provided by California Institute of Technology, Division of the Humanities and Social Sciences in its series Working Papers with number
1219.
Length: 29 pages Date of creation: Mar 2005 Date of revision: Publication status: Published: Handle: RePEc:clt:sswopa:1219
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Goeree, Jacob K. & Holt, Charles A. & Palfrey, Thomas R., 2004.
"Regular quantal response equilibrium,"
Working Papers
1203, California Institute of Technology, Division of the Humanities and Social Sciences.
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Goeree, Jacob & Palfrey, Thomas & Rogers, Brian & McKelvey, Richard, 2004.
"Self-correcting Information Cascades,"
Working Papers
1197, California Institute of Technology, Division of the Humanities and Social Sciences.
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