ENDOGENOUS CORRELATED EQUILIBRIA IN NONCOOPERATIVE GAMES

Most of the results of modern game theory presuppose that the choices rational agents make in noncooperative games are probabilistically ind ependent. In this paper I argue that there is no a priori reason for r ational agents to assume probabilistic independence. I introduce a sol ution concept for noncooperative games called an endogenous correlated equilibrium, which generalizes the Nash equilibrium concept by droppi ng probabilistic independence. I contrast the endogenous correlated eq uilibrium with the correlated equilibrium defined by Aumann (1974, 198 7). I conclude that in general the endogenous correlated equilibrium c oncept is a more appropriate solution concept for noncooperative game theory than the less general Nash equilibrium concept. I close by disc ussing the relationship between endogenous correlated equilibrium and the game solution concept called rationalizability introduced by Bernh eim (1984) and Pearce (1984).