Backward induction and unacceptable offers

H.E.D. Houba, Q. Wen

    Research output: Contribution to JournalArticleAcademicpeer-review

    Abstract

    How to establish the existence of subgame perfect equilibrium (SPE) in bargaining models if no stationary SPEs (SSPEs) exist? The backward-induction technique of Shaked and Sutton (1984, Econometrica) applies to the cyclical structure of SPE payoffs and provides recursive dynamics on the bounds of SPE payoffs. Acceptable and unacceptable offers have to be incorporated for these dynamics to be necessary and sufficient for extreme SPEs. In this paper, we demonstrate how these recursive dynamics are directly applicable to establish the existence of SPE in a model with no SSPE. Also from these dynamics, the extreme SPE strategy profiles can easily be recovered.
    Original languageEnglish
    Pages (from-to)151-156
    JournalJournal of Mathematical Economics
    Volume54
    Issue numberOctober
    Early online date16 Feb 2014
    DOIs
    Publication statusPublished - 2014

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