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Are Equilibrium Strategies Unaffected by Incentives?

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  • Jack Hirshleifer
  • Eric Rasmusen

Abstract

In a mixed-strategy Nash equilibrium, changing one player's payoffs affects only the other player's equilibrium strategy mix. This `Payoff Irrelevance Proposition' (PIP) appears to undercut the main foundations of economic policy analysis since, allegedly, equilibrium behavior will not respond to changes in incentives. We show, in contrast, that: (1) When the policy-maker has the first move in a sequential-move game, the PIP does not hold. (2) Even in a simultaneous-move game, the PIP holds only when the policy space is discrete, and for sufficiently small payoff revisions. Thus, incentives do generally affect behavior in equilibrium.

Suggested Citation

  • Jack Hirshleifer & Eric Rasmusen, 1992. "Are Equilibrium Strategies Unaffected by Incentives?," Journal of Theoretical Politics, , vol. 4(3), pages 353-367, July.
    • Handle: RePEc:sae:jothpo:v:4:y:1992:i:3:p:353-367
    DOI: 10.1177/0951692892004003007
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    2. Franz Weissing & Elinor Ostrom, 1991. "Crime and Punishment: Further Reflections on the Counterintuitive Results of Mixed Equilibria Games," Journal of Theoretical Politics, , vol. 3(3), pages 343-350, July.

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