A systematic procedure for finding Perfect Bayesian Equilibria in Incomplete Information Games

Abstract

This paper provides a non-technical introduction to a procedure to find Perfect Bayesian equilibria (PBEs) in incomplete information games. Despite the rapidly expanding literature on industrial organization that uses PBE as its main solution concept, most undergraduate and graduate textbooks still present a relatively theoretical introduction to PBEs. This paper offers a systematic five-step procedure that helps students find all pure-strategy PBEs in incomplete information games. Furthermore, it illustrates a step-by-step application of this procedure to a signaling game, using a worked-out example.