Implementation, elimination of weakly dominated strategies and evolutionary dynamics

Cabrales, Antonio; Ponti, Giovanni

Implementation, elimination of weakly dominated strategies and evolutionary dynamics

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Citation

Review of Economic Dynamics, 3, (2000), pp. 247-282

Abstract

This paper is concerned with the realism of mechanisms that implement social choice functions in the traditional sense. Will agents actually play the equilibrium assumed by the analysis? As an example, we study the convergence and stability properties of Sj\"ostr\"om's (1994) mechanism, on the assumption that boundedly rational players find their way to equilibrium using monotonic learning dynamics and also with fictitious play. This mechanism implements most social choice functions in economic environments using as a solution concept the iterated elimination of weakly dominated strategies (only one round of deletion of weakly dominated strategies is needed). There are, however, many sets of Nash equilibria whose payoffs may be very different from those desired by the social choice function. With monotonic dynamics we show that many equilibria in all the sets of equilibria we describe are the limit points of trajectories that have completely mixed initial conditions. The initial conditions that lead to these equilibria need not be very close to the limiting point. Furthermore, even if the dynamics converge to the ``right'' set of equilibria, it still can converge to quite a poor outcome in welfare terms. With fictitious play, if the agents have completely mixed prior beliefs, beliefs and play converge to the outcome the planner wants to implement.