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Are Equilibrium Strategies Unaffected by Incentives

Author

Listed:
  • Jack Hirshleifer

    (UCLA)

  • Eric Rasmusen

    (UCLA)

Abstract
In a mixed-strategy Nash equilibrium, changing one player's payoffs affects only the other player's equilibrium strategy mix. This `Payoff Irrelevance Proposition' (PIP) appears to undercut the main foundations of economic policy analysis since, allegedly, equilibrium behavior will not respond to changes in incentives. We show, in contrast, that: (1) When the policy-maker has the first move in a sequential-move game, the PIP does not hold. (2) Even in a simultaneous-move game, the PIP holds only when the policy space is discrete, and for sufficiently small payoff revisions. Thus, incentives do generally affect behavior in equilibrium.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Jack Hirshleifer & Eric Rasmusen, 1990. "Are Equilibrium Strategies Unaffected by Incentives," UCLA Economics Working Papers 595, UCLA Department of Economics.
    • Handle: RePEc:cla:uclawp:595
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    1. Gary S. Becker, 1974. "Crime and Punishment: An Economic Approach," NBER Chapters, in: Essays in the Economics of Crime and Punishment, pages 1-54, National Bureau of Economic Research, Inc.
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    Cited by:

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    2. Franz Weissing & Elinor Ostrom, 1991. "Crime and Punishment: Further Reflections on the Counterintuitive Results of Mixed Equilibria Games," Journal of Theoretical Politics, , vol. 3(3), pages 343-350, July.

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