Approximate Knowledge of Rationality and Correlated Equilibria

• Authors: Fabrizio Germano.
• BSE Working Paper: 642 | September 15
• Keywords: information , bounded rationality , correlated equilibrium , approximate common knowledge , p-rational belief system , common prior , noncooperative game
• JEL codes: C72, D82, D83
• information
• bounded rationality
• correlated equilibrium
• approximate common knowledge
• p-rational belief system
• common prior
• noncooperative game

We extend Aumann’s theorem [Aumann 1987], deriving correlated equilibria as a consequence of common priors and common knowledge of rationality, by explicitly allowing for non-rational behavior. We replace the assumption of common knowledge of rationality with a substantially weaker one, joint p-belief of rationality, where agents believe the other agents are rational with probability p or more. We show that behavior in this case constitutes a kind of correlated equilibrium satisfying certain p-belief constraints, and that it varies continuously in the parameters p and, for p sufficiently close to one, with high probability is supported on strategies that survive the iterated elimination of strictly dominated strategies. Finally, we extend the analysis to characterizing rational expectations of interim types, to games of incomplete information, as well as to the case of non-common priors.