Infinite horizon dynamic games: A new approach via information updating

Abstract

This paper formulates a new approach to analyze infinite horizon dynamic games with uncertainties and unknowns in the players’ future payoff structures. In many game situations, the game horizon would last for an indefinitely long period and one has to consider them as infinite horizon games. Existing infinite horizon dynamic games often rely on the assumption of time-invariant game structures for the derivation of equilibrium solutions. However, many events in the considerably far future are intrinsically unknown. In this paper, information about the players’ future payoffs will be revealed as the game proceeds. Making use of the newly obtained information, the players revise their strategies accordingly, and the process will continue indefinitely. This new approach for the analysis of infinite horizon dynamic games via information updating provides a more realistic and practical alternative to the study of infinite horizon dynamic games.