Coherent Behavior in Noncooperative Games
by Robert F. Nau and Kevin F. McCardle (Journal of Economic Theory 50:2 424-444)
Abstract: A new concept of mutually expected rationality in noncooperative games is proposed: joint coherence. This is an extension of the ``no arbitrage opportunities'' axiom that underlies subjective probability theory and a variety of economic models. It sheds light on the controversy over the strategies that can reasonably be recommended to or expected to arise among Bayesian rational players. Joint coherence is shown to support Aumann's position in favor of objective correlated equilibrium, although the common prior assumption is weakened and viewed as a theorem rather than an axiom. An elementary proof of the existence of correlated equilibria is given, and relationships with other solution concepts (Nash equilibrium, independent and correlated rationalizability) are also discussed.
Key Words: Correlated equilibrium, joint coherence, arbitrage, common knowledge, common prior assumption, rationalizability
(See also the description of this paper in my research summary.)