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Testing the Quantal Response Hypothesis

Melo, Emerson and Pogorelskiy, Kirill and Shum, Matthew (2014) Testing the Quantal Response Hypothesis. Social Science Working Paper, 1396. California Institute of Technology , Pasadena, CA. (Unpublished)

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This paper develops a formal test for consistency of players' behavior in a series of games with the quantal response equilibrium (QRE). The test exploits a characterization of the equilibrium choice probabilities in a QRE as the gradient of a convex function, which thus satisfies the cyclic monotonicity inequalities. Our testing procedure utilizes recent econometric results for moment inequality models. We assess the performance of the test using both Monte Carlo simulation and lab experimental data from a series of generalized matching pennies games. Our experimental findings are consistent with the literature: the joint hypothesis of QRE, risk neutrality and player role homogeneity is rejected in the pooled data, but cannot be rejected in the individual data for over half of the subjects. By considering subsets of cycle monotonicity inequalities, our approach also highlights the nature of QRE consistency violations.

Item Type:Report or Paper (Working Paper)
Related URLs:
URLURL TypeDescription ItemPublished Version
Melo, Emerson0000-0002-8129-5239
Pogorelskiy, Kirill0000-0002-3426-5870
Shum, Matthew0000-0002-6262-915X
Additional Information:September 2014. Acknowledgment: We thank Marina Agranov, Larry Blume, Federico Echenique, Ben Gillen, Phil Haile, Jorg Stoye, Leeat Yariv and especially Tom Palfrey for support and insightful comments. We are grateful to Michael McBride and Alyssa Acre at UC Irvine ESSL laboratory for help with running experiments.
Group:Social Science Working Papers
Subject Keywords:quantal response equilibrium, cyclic monotonicity, lab experiment
Series Name:Social Science Working Paper
Issue or Number:1396
Classification Code:JEL: C12, C14, C72, C92
Record Number:CaltechAUTHORS:20160329-095654596
Persistent URL:
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:65734
Deposited On:30 Mar 2016 23:03
Last Modified:03 Oct 2019 09:49

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