Testing for Nash behavior in entry games with complete information

Résumé

Nash equilibrium (NE) is a leading solution concept in the empirical analysis of entry games. The NE assumption is crucial, not just for estimation, but also for the validity of counterfactual exercises and policy implications. I propose a computationally simple sieve likelihood ratio type procedure to test the NE assumption in a complete information entry game with second-order rational players. The method is robust to partial identification and allows for nonparametric selection of equilibria.