The Intuitive Criterion

The Intuitive Criterion

Definition

The Intuitive Criterion, first described in 1987 Cho and Kreps article, is a refinement of the solution concept that allows the modeller to choose between multiple perfect Bayesian equilibria.

Formally, we can eliminate a particular perfect Bayesian equilibrium by using the Intuitive Criterion if there is some type θ who has a deviation that is assured of yielding him a payoff above his equilibrium payoff as long as other players do not assign a positive probability to the deviation having been made by any type θ for whom this action is equilibrium dominated.

Intuitively, we can eliminate a PBE if there is a type of player who wants to deviate even though he is not sure what the beliefs of other players are. The player is only sure that the other players will not think that he is a player who would find the deviation to be an equilibrium-dominated action.

Example

In the education signalling game with two types of players, a pooling equilibrium cannot be eliminated by any traditional refinements (Nash, PBE). But Cho-Kreps Intuitive criterion eliminates all pooling equilibria.In the game, there is a continuum of separating equilibria, but the Intuitive Criterion eliminates all the equilibria except for the most efficient one - i.e. the one where low-ability types are just about indifferent between acquiring the amount of education that high-ability types do, and not acquiring any education at all.

References

Cho, I-K. & Kreps, D. M. (1987) Signaling games and stable equilibria. Quarterly Journal of Economics 52:179-221.

Mas-Colell, Whinston, Green (1995) Microeconomic Theory

http://www.iew.uzh.ch/study/courses/downloads/signaling.pdf


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