A Semiparametric Test of Agent's Information Sets for Games of Incomplete Information

We propose semiparametric tests of misspeci cation of agent's information for games of incomplete information. The tests use the intuition that the opponent's choices should not predict a player's choice conditional on the proposed information available to the player. The tests are designed to check against some commonly used null hypotheses (Bajari et al. (2010), Aradillas-Lopez (2010)). We show that our tests have power to discriminate between common alternatives even in small samples. We apply our tests to data on entry in the US airline industry. Both the assumptions of independent and correlated private shocks are not supported by the data. ∗Corresponding address: Department of Economics, Social Science Centre, Room 4037, London, Ontario, N6A 5C2, Canada. Tel: +1 519 661 2111 ext 81586, Fax: +1 519 661 3666. E-mail address: [email protected] (S. Navarro), [email protected] (Y. Takahashi). We thank Jaap Abbring, Victor Aguirregabiria, Andres Aradillas-Lopez, Pat Bajari, Jean-Francois Houde, Aureo de Paula, Jack Porter and participants at the 2009 IIOC meetings, the eight invitational choice symposium and the 2011 AEA meetings. First draft: March, 2009. This draft: March, 2012.