Rational Learning One Step Off the Path

Abstract

We study how endogenous learning shapes beliefs and strategies in extensive-form games. We adopt the overlapping-generations model of \citet{FL1993}, in which finitely lived Bayesian agents are randomly matched, observe only the outcomes of their own matches, and choose dynamically optimal strategies. We study limiting strategy profiles in steady states as agents become arbitrarily long lived and patient. We show that learning disciplines beliefs and strategies in subgames reached after a single deviation from the path of play. In particular, we establish the converse of \citet{FL2006}, showing that such limiting strategy profiles must be path-equivalent to subgame-confirmed equilibria.