Econometrica: Nov, 1987, Volume 55, Issue 6

A Refinement of Sequential Equilibrium

https://doi.org/0012-9682(198711)55:6<1367:AROSE>2.0.CO;2-8
p. 1367-1389

In-Koo Cho

We propose a refinement of sequential equilibrium for extensive form games by generalizing a restriction proposed for signaling games in Cho and Kreps (1987).^2 The restriction is that beliefs must not assign positive weight to the possibilities that can be excluded through reasonable introspection based on the data available as common knowledge. A new technique is developed in order to prove the existence of forward induction equilibrium, which consists of two steps. First, we establish the generic existence of forward induction equilibrium by exploiting the results of Kohlberg and Mertens (1986). Then, we show that the forward induction equilibrium correspondence is upper hemi-continuous in the outcome space with respect to the changes of parameters of the game.