Uncertain Information Structures and Backward Induction

Journal of Mathematical Economics. 2017. Vol. 71. P. 135–151.

Zuazo-Garin P.

In everyday economic interactions, it is not clear whether each agent’s sequential choices are visible to other participants or not: agents might be deluded about others’ ability to acquire, interpret or keep track of data. Following this idea, this paper introduces uncertainty about players’ ability to observe each others’ past choices in extensive-form games. In this context, we show that monitoring opponents’ choices does not affect the outcome of the interaction when every player expects their opponents indeed to be monitoring. Specifically, we prove that if players are rational and there is common strong belief in opponents being rational, having perfect information and believing in their own perfect information, then, the backward induction outcome is obtained regardless of which of her opponents’ choices each player observes. The paper examines the constraints on the rationalization process under which reasoning according to Battigalli’s (1996) best rationalization principle yields the same outcome irrespective of whether players observe their opponents’ choices or not. To this respect we find that the obtention of the backward induction outcome crucially depends on tight higher-order restrictions on beliefs about opponents’ perfect information. The analysis provides a new framework for the study of uncertainty about information structures and generalizes the work by Battigalli and Siniscalchi (2002) in this direction.

Keywords: Perfect information, Backward induction, Rationality, Extensive-form games, Incomplete information, Forward induction