Econometric Equilibria for Non-Cooperative Games

Abstract

Game theory and econometrics are central tools in economic analysis. In this paper, we study what happens if players in a game use econometric tools to form their opinion about the other players' behavior. In particular, we analyze the case where each player observes a number of outcomes of a game. From these observations she forms her beliefs about other players’ strategies. She then plays her best answer strategy. We show that in this framework an equilibrium exists, which we call the econometric equilibrium. The econometric equilibrium generally differs from the Nash equilibrium. However, it converges to a Nash equilibrium if the number of observations of the game increases to infinity.