Common p-belief in rationality in centipede games

Abstract

Centipede Games represent a classic puzzle in game theory. In this work, we employ p-beliefs to show that almost any behavior is consistent with rationality and almost Common Belief in Rationality. However, Common p-Belief in Rationality cannot justify why people cooperate in some Centipede Games but not others in a non-trivial way. We thus propose a novel theoretical framework that links the p-beliefs in rationality to the incentives to cooperate. This more general subjective belief-based approach serves as a predictor of cooperation. We show that the proposed approach organizes well the behavior in an experiment with a large variety of Centipede Games.