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  3. American Economic Journal: Microeconomics
  4. May 2020
  5. Revealed Preference Implications of Backward Induction and Subgame Perfection

American Economic Journal:
Microeconomics

ISSN 1945-7669 (Print) | ISSN 1945-7685 (Online)

Revealed Preference Implications of Backward Induction and Subgame Perfection

  • Pablo Schenone
American Economic Journal: Microeconomics
vol. 12, no. 2, May 2020
(pp. 230–56)
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Abstract

Consider a decision-maker (DM) who must select an alternative from a set of mutually exclusive alternatives but must take this decision sequentially. If the DM's choice correspondence over subsets of alternatives satisfies the weak axiom of revealed preference (WARP), then the subgame perfect Nash equilibrium (SPNE) and backward induction (BI) strategies coincide. We study the relation between the SPNE and BI strategies when the DM's choice correspondence fails to satisfy WARP. First, Sen's axiom alpha is necessary and sufficient for the set of SPNE strategies to be a subset of the set of BI strategies; moreover, a mild strengthening of Sen's axiom β is necessary and sufficient for the set of BI strategies to be a subset of the set of SPNE strategies. These results extend to multiplayer games.

Citation

Schenone, Pablo. 2020. "Revealed Preference Implications of Backward Induction and Subgame Perfection." American Economic Journal: Microeconomics 12 (2): 230–56. DOI: 10.1257/mic.20180077

Additional Materials

JEL Classification

  • C72 Noncooperative Games
  • C73 Stochastic and Dynamic Games; Evolutionary Games; Repeated Games
  • D11 Consumer Economics: Theory