Recursive construction of a Nash equilibrium in a two-player nonzero-sum stopping game with asymmetric information

Abstract: We study a discrete-time finite-horizon two-players nonzero-sum stopping game where the filtration of Player 1 is richer than the filtration of Player 2. A major difficulty which is caused by the information asymmetry is that Player 2 may not know whether Player 1 has already stopped the game or not. Furthermore, the classical backward-induction approach is not applicable in the current setup. This is because when the informed player decides not to stop, he reveals information to the uninformed player and hence the decision of the uninformed player at time $t$ may not be determined by the play after time $t$, but also on the play before time $t$. In the current work we initially show that the expected utility of Player 2 will remain the same even if he knows whether Player 1 has already stopped. Then, this result is applied in order to prove that, under appropriate conditions, a recursive construction in the style of Hamad\'ene and Zhang (2010) converges to a pure-strategy Nash equilibrium.