Testing for Equilibrium Multiplicity in Dynamic Markov Games

Otsu, Taisuke; Pesendorfer, Martin and Takahashi, Yuya (April 2013): Testing for Equilibrium Multiplicity in Dynamic Markov Games. SFB/TR 15 Discussion Paper No. 423

Abstract

This paper proposes several statistical tests for finite state Markov games to examine the null hypothesis that the data are generated from a single equilibrium. We formulate tests of (i) the conditional choice probabilities, (ii) the steady-state distribution of states and (iii) the conditional distribution of states conditional on an initial state. In a Monte Carlo study we find that the chi-squared test of the steady-state distribution performs well and has high power even with a small number of markets and time periods. We apply the chi-squared test to the empirical application of Ryan (2012) that analyzes dynamics of the U.S. Portland Cement industry and test if his assumption of single equilibrium is supported by the data.

• Item Type: Paper
• Form of publication: Preprint
• Keywords: Dynamic Markov Game, Multiplicity of Equilibria, Testing
• Faculties: Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems; Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems > C9 - Stabilität, Wettbewerb und Liquidität in Finanzmärkten
• Subjects: 300 Social sciences > 330 Economics
• JEL Classification: C12, C72, D44
• Language: English