Misspecified Bayesian Learning by Strategic Players: First-Order Misspecification and Higher-Order Misspecification

Takeshi Murooka and Yuichi Yamamoto
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Takeshi Murooka: Osaka School of International Public Policy, Osaka University
Yuichi Yamamoto: Institute of Economic Research, Hitotsubashi University

No 21E008, OSIPP Discussion Paper from Osaka School of International Public Policy, Osaka University

Abstract: We consider strategic players who may have a misspecified view about the world, and investigate their long-run behavior when they learn an unknown state from public signals over time. Our framework is flexible and allows for higher-order misspecification, in that a player may have a bias about the physical environment, a bias about the opponent's bias about the physical environment, and so on. We provide a condition under which players' beliefs and actions converge to a steady state, and then characterize how one's misspecification influences the long-run (steady-state) outcome. We apply these results to various economic examples such as Cournot competition, team production, and discrimination. We find that higher-order misspecification can have a significant impact on the equilibrium outcome: One's overconfidence can have opposite effects on the equilibrium outcome, depending on whether the opponent is aware of this bias or not.

Keywords: model misspecification; learning; convergence; overconfidence; bias transmission (search for similar items in EconPapers)
JEL-codes: C73 D83 D90 D91 (search for similar items in EconPapers)
Pages: 96 pages
Date: 2021-12
New Economics Papers: this item is included in nep-gth and nep-mic
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