Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/299360 
Year of Publication: 
2024
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2024-24
Publisher: 
Bank of Canada, Ottawa
Abstract: 
We study the falsifiability and identification of Quantal Response Equilibrium (QRE) when each player's utility and error distribution are relaxed to be unknown non-parametric functions. Using variations of players' choices across a series of games, we first show that both the utility function and the distribution of errors are non-parametrically over-identified. This result further suggests a straightforward testing procedure for QRE that achieves the desired type-1 error and maintains a small type-2 error. To apply this methodology, we conduct an experimental study of the matching pennies game. Our non-parametric estimates strongly reject the conventional logit choice probability. Moreover, when the utility and the error distribution are sufficiently flexible and heterogeneous, the quantal response hypothesis cannot be rejected for 70% of participants. However, strong assumptions such as risk neutrality, logistically distributed errors and homogeneity lead to substantially higher rejection rates.
Subjects: 
Econometric and statistical methods
Economic models
JEL: 
C14
C57
C92
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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