A Note on the Institution as a Nested Reasoning Structure in Terms of Bounded Cognition



The present note discusses a new view of the institution as a nested structure of reciprocal reasoning. To explain the emergence of a Nash equilibrium, Aumann assumed common knowledge of the conjectures of agents with respect to strategy spaces. In the present note, we demonstrate that common knowledge can be defined by knowledge and infinite reasoning. However, recent studies in experimental economics, suggest that the assumption of infinite reciprocal reasoning is, in most cases, neither empirically relevant nor necessary for achieving a Nash equilibrium. Moreover, we demonstrate that reasonable states, which are composed of non-Nash equilibrium strategies, are attained only by bounded reasoning agents. Furthermore, this view of the institution is applied to examples such as Bentham’s Panopticon and the depth of reasoning in the institution is examined.


institution finite nest of reciprocal reasoning mutual knowledge belief system 


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© Japan Association for Evolutionary Economics 2009

Authors and Affiliations

  1. 1.JSPS Research FellowJapan

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