Identification of a Simple Dynamic Discrete Game under Rationalizability (original) (raw)

This paper studies the identification power of rationalizability in a simple dynamic discrete game model. The paper extends to dynamic games some of the results in Aradillas-Lopez and Tamer (2007). The most commonly used equilibrium concept in empirical applications of dynamic games is Markov Perfect Equilibrium (MPE). I study the identification of structural parameters when we replace the MPE assumption with weaker conditions such as rational behavior or rationalizability. I present identification results for a simple dynamic game of market entry-exit with two players. Under the assumption of level-2 rationalizability (i.e., players are rational and they know that they are rational), exclusion restrictions and large-support conditions on the exogenous explanatory variables are sufficient for point-identification of all the structural parameters. Though the model is fully parametric, the key identifying assumptions are nonparametric in nature and it seems that these identification r...