ShortTh&Exp - THEORY AND EXPERIMENT IN THE ANALYSIS OF STRATEGIC INTERACTION1 Vincent P Crawford University of California San Diego One

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1 THEORY AND EXPERIMENT IN THE ANALYSIS OF STRATEGIC INTERACTION 1 Vincent P. Crawford, University of California, San Diego One cannot, without empirical evidence, deduce what understandings can be perceived in a nonzero-sum game of maneuver any more than one can prove, by purely formal deduction, that a particular joke is bound to be funny. Thomas Schelling, The Strategy of Conflict 1. Introduction Much of economics has to do with the coordination of independent decisions, and such questions—with some well-known exceptions—are inherently game-theoretic. Yet when the Econometric Society held its First World Congress in 1965, economic theory was almost entirely nonstrategic and game theory remained largely a branch of mathematics, whose applications in economics were the work of a few pioneers. As recently as the early 1970s, the profession's view of game-theoretic modeling was typified by Paul Samuelson's customarily vivid phrase, "the swamp of n-person game theory"; and even students to whom the swamp seemed a fascinating place thought carefully before descending from the high ground of perfect competition and monopoly. The game-theoretic revolution that ensued altered the landscape in ways that would have been difficult to imagine in 1965, adding so much to our understanding that many questions whose strategic aspects once made them seem intractable are now considered fit for textbook treatment. This process was driven by a fruitful dialogue between game theory and economics, in which game theory supplied a rich language for describing strategic interactions and a set of tools for predicting their outcomes, and economics contributed questions and intuitions about strategic behavior against which game theory's methods could be tested and honed. As game-theoretic formulations and analyses enriched economics, economic applications inspired extensions and refinements of game theory's methods, transforming game theory from a branch of mathematics with a primarily normative focus into a powerful tool for positive analysis. To date this dialogue has consisted mostly of conversations among theorists, with introspection and casual empiricism the main sources of information about behavior. A typical exchange proceeds by modeling an economic environment as a noncooperative game; identifying 1 Invited Symposium Lecture at the Econometric Society Seventh World Congress, Tokyo, 1995, reprinted from David Kreps and Ken Wallis, editors, Advances in Economics and Econometrics: Theory and Applications, Seventh World Congress , Vol. I, New York: Cambridge University Press, 1997. Thanks to John McMillan, Alvin Roth, Joel Sobel,
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2 its equilibria; selecting one using common sense, equilibrium refinements, dynamic arguments, or convenience; comparing the selected equilibrium with stylized facts and intuitions about outcomes; and eliminating discrepancies, as far as possible, by adjusting the model or proposing new selection criteria. The unstated goal of most such analyses has been to predict behavior entirely by theory.
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This note was uploaded on 09/19/2011 for the course ECON 208 taught by Professor Sobel,j during the Spring '08 term at UCSD.

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ShortTh&Exp - THEORY AND EXPERIMENT IN THE ANALYSIS OF STRATEGIC INTERACTION1 Vincent P Crawford University of California San Diego One

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