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Are Equilibrium Strategies Unaffected by Incentives?

Eric Rasmusen

In a mixed-strategy Nash equilibrium, changing one player's payoffs affects only the other player's equilibrium strategy mix. This `Payoff Irrelevance Proposition' (PIP) appears to undercut the main foundations of economic policy analysis since, allegedly, equilibrium behavior will not respond to changes in incentives. We show, in contrast, that: (1) When the policy-maker has the first move in a sequential-move game, the PIP does not hold. (2) Even in a simultaneous-move game, the PIP holds only when the policy space is discrete, and for sufficiently small payoff revisions. Thus, incentives do generally affect behavior in equilibrium.

Key Words: game theory • incentives and payoffs • mixed strategies • the Police Game

Journal of Theoretical Politics, Vol. 4, No. 3, 353-367 (1992)
DOI: 10.1177/0951692892004003007


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