Proper rationalizability and belief revision in dynamic games

Abstract

In this paper we develop an epistemic model for dynamic games in which players may revise their beliefs about the opponents'' preferences (including the opponents'' utility functions) as the game proceeds. Within this framework, we propose a rationalizability concept that is based upon the following three principles: (1) at every instance of the game, a player should believe that his opponents are carrying out optimal strategies, (2) a player should only revise his belief about an opponent''s relative ranking of two strategies if he is certain that the opponent has decided not to choose one of these strategies, and (3) the players'' initial beliefs about the opponents'' utility functions should agree on a given profile u of utility functions. Common belief about these events leads to the concept of persistent rationalizability for the profile u of utility functions. It is shown that for a given profile u of utility functions, every properly rationalizable strategy for ``types with non-increasing type supports'''' is a persistently rationalizable strategy for u. This result implies that persistently rationalizable strategies always exist for all game trees and all profiles of utility functions.