Common Knowledge

Abstract

An event is common knowledge among a group of agents if each one knows it, if each one knows that the others know it, if each one knows that each one knows that the others know it, and so on. Thus, common knowledge is the limit of a potentially infinite chain of reasoning about knowledge. The purpose of this paper is to survey some of the implications for economic behavior of the hypotheses that events are common knowledge, that actions are common knowledge, that optimization is common knowledge, and that rationality is common knowledge. It will begin with several puzzles that illustrate the strength of the common knowledge hypothesis. It will then study how common knowledge can illuminate many problems in economics. In general, the discussion will show that a talent for interactive thinking is advantageous, but if everyone can think interactively and deeply all the way to common knowledge, then sometimes puzzling consequences may result.