Identification of Non-Equilibrium Beliefs in Games of Incomplete Information Using Experimental Data

Abstract

Abstract This paper studies the identification of players’ preferences and beliefs in discrete choice games using experimental data. The experiment comprises a set of games that differ in their matrices of monetary payoffs. The researcher is interested in the identification of preferences (utility of money) and beliefs on the opponents’ expected behavior, without imposing equilibrium restrictions or parametric assumptions on utility and belief functions. We show that the hypothesis of unbiased/rational beliefs is testable as long as the set of games in the experiment imply variation in monetary payoffs of other players, keeping the own monetary payoff constant. We present conditions for the full identification of utility and belief functions at the individual level – without restrictions on players’ heterogeneity in preferences or beliefs. We apply our method to data from two experiments: a matching pennies game, and a public good game.