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Experimental Tests of a Sequential Equilibrium Reputation Model

Camerer, Colin and Weigelt, Keith (1998) Experimental Tests of a Sequential Equilibrium Reputation Model. Econometrica, 56 (1). pp. 1-36. ISSN 0012-9682. http://resolver.caltech.edu/CaltechAUTHORS:20110214-152251916

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Abstract

We test whether a model of reputation formation in an incomplete information game, using sequential equilibrium, predicts behavior of players in an experiment. Subjects play an abstracted lending game: a B player lends or does not lend; then if B lends, an E player can pay back or renege. The game is played 8 times, and there is a small controlled probability that the E player's induced preferences make him prefer to pay back (but usually he prefers to renege). In sequential equilibrium, even E players who prefer to renege should pay back in early periods of the game, and renege with increasing frequency in later periods, to establish reputations for preferring to pay back. After many repetitions of the 8-period game, actual play is roughly like the sequential equilibrium, except that E players pay back later in the game and more often than they should. This behavior is rational if B players have a "homemade" prior probability of .17 (in addition to the controlled probability) that E players will prefer to pay back. We conclude that sequential equilibrium with homemade incomplete information describes actual behavior well enough that it is plausible to apply it to theoretical settings where individuals make choices (e.g., product markets, labor markets, bargaining).


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http://www.jstor.org/stable/1911840PublisherUNSPECIFIED
Additional Information:© 1988 The Econometric Society. Thanks to James Friedman, Charles Holt, David Kreps, Robert Wilson, two anonymous referees, and participants at the 1986 Public Choice Society Meetings, the 1986 Summer Econometric Society Meetings, the University of Iowa, New York University, and the Wharton Decision Processes bag lunch seminar, for comments. This research was funded by the New York University Center for Entrepreneurial Studies.
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New York University Center for Entrepreneurial StudiesUNSPECIFIED
Subject Keywords:experiments, sequential equilibrium, reputation, incomplete information
Record Number:CaltechAUTHORS:20110214-152251916
Persistent URL:http://resolver.caltech.edu/CaltechAUTHORS:20110214-152251916
Official Citation:Experimental Tests of a Sequential Equilibrium Reputation Model Colin Camerer and Keith Weigelt Econometrica Vol. 56, No. 1 (Jan., 1988), pp. 1-36 Published by: The Econometric Society Article Stable URL: http://www.jstor.org/stable/1911840
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:22176
Collection:CaltechAUTHORS
Deposited By: Tony Diaz
Deposited On:09 Mar 2011 23:45
Last Modified:09 Mar 2011 23:45

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