Center for Mathematical Economics Working Papers 571
This text reviews a recent approach to modeling "radically uncertain" behavior in strategic interactions. By rigorously rooting the approach in decision theory, we provide a foundation for applications of Knightian uncertainty in mechanism design, principal agent and moral hazard models. We discuss critical assessments and provide alternative interpretations of the new equilibria in terms of equilibrium in beliefs, and as a boundedly rational equilibrium in the sense of a population equilibrium. We also discuss the purification of equilibria in the spirit of Harsanyi.
Knightian Uncertainty in Games Strategic Ambiguity Ellsberg Games Purification