Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 743: Stochastic stability in finite extensive-form games of perfect information

Zibo Xu ()
Additional contact information
Zibo Xu: Dept. of Economic Statistics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden

Abstract: We consider a basic stochastic evolutionary model with rare mutation and a best-reply (or better-reply) selection mechanism. Following Young's papers, we call a state stochastically stable if its long-term relative frequency of occurrence is bounded away from zero as the mutation rate decreases to zero. We prove that, for all finite extensive-form games of perfect information, the best-reply dynamic converges to a Nash equilibrium almost surely. Moreover, only Nash equilibria can be stochastically stable. We present a `centipede-trust game', where we prove that both the backward induction equilibrium component and the Pareto-dominant equilibrium component are stochastically stable, even when the populations increase to infinity. For finite extensive-form games of perfect information, we give a sufficient condition for stochastic stability of the set of non-backward-induction equilibria, and show how much extra payoff is needed to turn an equilibrium stochastically stable.

Keywords: Evolutionary game theory; Markov chains; equilibrium selection; stochastic stability; games in extensive form; games of perfect information; backward induction equilibrium; Nash equilibrium components; best-reply dynamics.

JEL-codes: C61; C62; C73

60 pages, March 21, 2013

Note: This working paper is a revised version of `Evolutionary stability in general extensive-form games of perfect information' in Discussion Paper Series 631, the Center for the Study of Rationality, Hebrew University of Jerusalem. The author is grateful to Sergiu Hart and Jorgen Weibull for many suggestions and discussions. The author also wishes to thank Katsuhiko Aiba, Tomas Rodriguez Barraquer, Yosef Rinott, Bill Sandholm and Eyal Winter for their comments. The author would like to acknowledge financial support from the European Research Council under the European Community's Seventh Framework Programme (FP7/2007-2013) / ERC grant agreement No. 249159, and from the Knut and Alice Wallenberg Foundation.

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