Abstract
We endogenize the precision parameter λ of logit quantal response equilibrium (LQRE). In the first stage of an endogenous quantal response equilibrium (EQRE), each player chooses her precision optimally subject to costs, taking as given other players’ (second-stage) behavior. In the second stage, the distribution of players’ actions is a heterogenous LQRE given the profile of first-stage precision choices. EQRE satisfies a modified version of the regularity axioms, nests LQRE as a limiting case for a sequence of cost functions, and admits analogues of classic results for LQRE such as those for equilibrium selection. We show how EQRE differs from LQRE using the family of generalized matching pennies games.
Published Version
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