A simple case of rationality of escalation

TL;DR

This paper demonstrates that escalation in simple infinite games like the 0,1-game can be rational, highlighting the usefulness of coinduction in economic game analysis.

Contribution

It introduces the 0,1-game as a fundamental example where escalation is rational, emphasizing the role of coinduction in understanding infinite game behaviors.

Findings

Escalation can be rational in simple infinite games.

Coinduction is a valuable tool for analyzing economic games.

The 0,1-game exemplifies natural escalation in rational strategies.

Abstract

Escalation is the fact that in a game (for instance an auction), the agents play forever. It is not necessary to consider complex examples to establish its rationality. In particular, the $0,1$-game is an extremely simple infinite game in which escalation arises naturally and rationally. In some sense, it can be considered as the paradigm of escalation. Through an example of economic games, we show the benefit economics can take of coinduction.