Ulric B. and Evelyn L. Bray Social Sciences Seminar
Abstract: Off-path beliefs are a key free variable in equilibrium analysis of dynamic games of incomplete information. Our starting point is the observation that, if we take into account players' incentives to monitor past events in the game, then we can sidestep the question of off-path beliefs. We focus on signaling games where the receiver has to pay a cost to monitor the sender's action. We show that Nash equilibrium is outcome equivalent to any refinement of perfect Bayesian equilibrium that puts restrictions on the receiver's off-path beliefs. We then characterize all Nash equilibria that can arise across all cost functions. As an application, we consider the case of vanishing costs to provide a micro-foundation for restrictions on off-path beliefs in standard signaling games where the receiver observes for free the sender's action.