Abstract
This article considers the impact of ambiguity in strategic situations. It extends the existing literature on games with ambiguity‐averse players by allowing for optimistic responses to ambiguity. We use the CEU model of ambiguity with a class of capacities introduced by Jaffrray and Philippe (Mathematics of Operations Research 22 (1997), 165–85), which allows us to distinguish ambiguity from ambiguity‐attitude, and propose a new solution concept, equilibrium under ambiguity (EUA), for players who may be characterized by ambiguity‐preference. Applying EUA, we study comparative statics of changes in ambiguity‐attitude in games with strategic complements. This extends work in Eichberger and Kelsey (Journal of Economic Theory 106 (2002), 436–66) on the effects of increasing ambiguity if players are ambiguity averse.
Highlights
Beginning with the seminal work of von-Neumann and Morgenstern (1944), expected utility theory (EUT) has been closely related to the analysis of strategic decision-making
There is a small literature about strategic behaviour in games, reviewed below, which deals with the three main issues arising in games by departing from expected utility theory: 1. How much consistency in beliefs does one want to impose in equilibrium? 2
We have studied the impact of ambiguity in games with players who are not necessarily ambiguity-averse
Summary
Beginning with the seminal work of von-Neumann and Morgenstern (1944), expected utility theory (EUT) has been closely related to the analysis of strategic decision-making. How much consistency in beliefs does one want to impose in equilibrium? 3. How do attitudes towards ambiguity a¤ect behaviour in games?. As we will show, extending the analysis to include ambiguity-seeking requires us to reconsider the question of consistency in beliefs. Instead we use lattice theory to demonstrate existence of equilibrium in games with increasing di¤erences.. Instead we use lattice theory to demonstrate existence of equilibrium in games with increasing di¤erences.1 We view it as an advantage of this approach that it enables us to study existence and comparative statics in a common framework. Games with increasing di¤erences have many economic applications, for instance in industrial organization, macroeconomics, and public good provision
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