Heifetz, Aviad Meier, Martin Schipper, Burkhard C.
Year of Publication:
Working papers // University of California, Department of Economics 07,3
We define a generalized state-space model with interactive unawareness and probabilistic beliefs. Such models are desirable for many potential applications of asymmetric unawareness. We develop Bayesian games with unawareness, define equilibrium, and prove existence. We show how equilibria are extended naturally from lower to higher awareness levels and restricted from higher to lower awareness levels. We use our unawareness belief structure to show that the common prior assumption is too weak to rule out speculative trade in all states. Yet, we prove a generalized No-trade theorem according to which there can not be common certainty of strict preference to trade. Moreover, we show a generalization of the No-agreeing-to-disagree theorem.
unawareness awareness type-space Bayesian games incomplete information equilibrium common prior agreement speculative trade interactive epistemology