A learning-based model of repeated games with incomplete information

Abstract

This paper tests a learning-based model of strategic teaching in repeated games with incomplete information. The repeated game has a long-run player whose type is unknown to a group of short-run players. The proposed model assumes a fraction of ‘short-run’ players follow a one-parameter learning model (self-tuning EWA). In addition, some ‘long-run’ players are myopic while others are sophisticated and rationally anticipate how short-run players adjust their actions over time and “teach” the short-run players to maximize their long-run payoffs. All players optimize noisily. The proposed model nests an agent-based quantal-response equilibrium (AQRE) and the standard equilibrium models as special cases. Using data from 28 experimental sessions of trust and entry repeated games, including 8 previously unpublished sessions, the model fits substantially better than chance and much better than standard equilibrium models. Estimates show that most of the long-run players are sophisticated, and short-run players become more sophisticated with experience.