Understanding how individuals or groups interact is at the core of virtually every economic and social problem. A central difficulty in studying such interactions is the fact that, in practice, players face strategic uncertainty, that is, they (often) do not know what their opponents plan to play and how their opponents will react to choices they adopt. For instance, a country may be uncertain about which tactics a terrorist organization is planning. And, likewise, the terrorist organization may be uncertain about what defense measures the country is adopting. Of course, which defense measures the country adopts will be influenced by what tactics it thinks the terrorist organization is planning. And, likewise, which tactics the terrorist organization adopts will depend on what defense measures it thinks the country has put in place. As such, which defense measures the country adopts will be influenced by what it (the country) thinks the terrorist organization thinks about its own defense strategy. And so on.
This project is aimed at bringing strategic uncertainty to bear on economic and social phenomena by using epistemic game theory to model it. There are two aspects of the project. First, it develops a set of tools aimed at bringing strategic uncertainty to bear on economic problems. Second, it uses these tools to show how, in important applications, strategic uncertainty can give way to novel behavioral predictions. One natural application of strategic uncertainty is to bargaining problems: If negotiators face uncertainty about how others bargain, then there may be difficulties in reaching agreements. The project identifies strategic uncertainty as a source of inefficiency in bargaining problems. It argues that these inefficiencies can arise, even if bargainers are strategically sophisticated (in the sense of engaging in forward induction reasoning) and even if strategic uncertainty only arises after surprise moves in the negotiation process. It derives testable implications. It goes on to address the extent to which efficiency can or cannot be improved, if the source of inefficiency is strategic uncertainty. This research can also have important implications for policy prescription, particularly in the area of mediated bargaining
