Belief Updating in Sequential Games of Two-Sided Incomplete Information: An Experimental Study of a Crisis Bargaining Model

We investigate theoretically and experimentally the "crisis bargaining model", a dynamic game of two-sided incomplete information with player types drawn from a commonly known distribution. Within the experiment we elicited beliefs from players about their opponent's type using a quadratic scoring rule. We implement two treatments that vary a fixed terminal node payoff in the game, generating sharp comparative static predictions in both beliefs and strategies. We examine the relationship between beliefs and actions, which is not well understood in the empirical literature. We find that most beliefs and strategies are responsive to our treatments in the way predicted by theory, and that beliefs track departures from theoretical predictions about strategy choice. We highlight evidence for two deviations from Bayesian beliefs: conservative updating and motivated beliefs. We also consider other important roles for beliefs in strategic choice including the extent of rational expectations and best response to beliefs.