Endogenous clustering and analogy-based expectation equilibrium

Philippe Jehiel; Giacomo Weber

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arXiv · 2505.13022

Endogenous clustering and analogy-based expectation equilibrium

Philippe Jehiel·Giacomo Weber

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Abstract

Normal-form two-player games are categorized by players into K analogy classes so as to minimize the prediction error about the behavior of the opponent. This results in Clustered Analogy-Based Expectation Equilibria in which strategies are analogy-based expectation equilibria given the analogy partitions and analogy partitions minimize the prediction errors given the strategies. We distinguish between environments with self-repelling analogy partitions in which some mixing over partitions is required and environments with self-attractive partitions in which several analogy partitions can arise, thereby suggesting new channels of belief heterogeneity and equilibrium multiplicity. Various economic applications are discussed.

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Philippe Jehiel, Giacomo Weber. 2025-05-19. Endogenous clustering and analogy-based expectation equilibrium. https://arxiv.org/abs/2505.13022

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