Discerning Solution Concepts

TL;DR

This paper develops conditions to distinguish between different solution concepts in discrete complete-information games, enhancing the ability to identify the underlying strategic behavior from observed data.

Contribution

It introduces a set of conditions to discern whether observed data is generated by specific solution concepts like Nash equilibrium or rationalizable behavior.

Findings

Conditions to identify Nash equilibrium from data

Method to distinguish rationalizable, maxmin, and collusive behaviors

Novel approach to identify correlation structure of unobserved shocks

Abstract

The empirical analysis of discrete complete-information games has relied on behavioral restrictions in the form of solution concepts, such as Nash equilibrium. Choosing the right solution concept is crucial not just for identification of payoff parameters, but also for the validity and informativeness of counterfactual exercises and policy implications. We say that a solution concept is discernible if it is possible to determine whether it generated the observed data on the players' behavior and covariates. We propose a set of conditions that make it possible to discern solution concepts. In particular, our conditions are sufficient to tell whether the players' choices emerged from Nash equilibria. We can also discern between rationalizable behavior, maxmin behavior, and collusive behavior. Finally, we identify the correlation structure of unobserved shocks in our model using a novel approach.