Recursive construction of a Nash equilibrium in a two-player nonzero-sum stopping game with asymmetric information

TL;DR

This paper develops a recursive method to construct a Nash equilibrium in a two-player nonzero-sum stopping game with asymmetric information, overcoming challenges posed by information asymmetry and the inapplicability of classical backward induction.

Contribution

It introduces a novel recursive construction approach that converges to a pure-strategy Nash equilibrium in a complex asymmetric information setting.

Findings

Expected utility of Player 2 remains unchanged even if informed of Player 1's stopping.

Recursive construction converges to a Nash equilibrium under certain conditions.

Classical backward induction is not applicable due to information asymmetry.

Abstract

We study a discrete-time finite-horizon two-players nonzero-sum stopping game where the filtration of Player 1 is richer than the filtration of Player 2. A major difficulty which is caused by the information asymmetry is that Player 2 may not know whether Player 1 has already stopped the game or not. Furthermore, the classical backward-induction approach is not applicable in the current setup. This is because when the informed player decides not to stop, he reveals information to the uninformed player and hence the decision of the uninformed player at time $t$ may not be determined by the play after time $t$, but also on the play before time $t$. In the current work we initially show that the expected utility of Player 2 will remain the same even if he knows whether Player 1 has already stopped. Then, this result is applied in order to prove that, under appropriate conditions, a recursive construction in the style of Hamad\'ene and Zhang (2010) converges to a pure-strategy Nash equilibrium.