Class-17-2023

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Jan 9, 2024

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THE UNIVERSITY OF BRITISH COLUMBIA 1. The Hold-Up Problem 2. Behavioural Game Theory 3. The Ultimatum Game 4. The Beauty Contest Game Readings: 13.5-13.6 Managerial Economics Class 16
THE UNIVERSITY OF BRITISH COLUMBIA 1. The Hold Up Problem The hold-up problem illustrates a potential disadvantage of moving first. If one player has to make sunk investments as part of an agreement with a second player, the second player may seek to take advantage of the sunk investment. Therefore, the first player may decline to make the investment even if it could potentially raise surplus for both parties. An example is expropriation. If a company builds a production facility in some country, the government of that country can subsequently demand extra payments from the company or simply expropriate the assets (hold up). If so, the company might avoid the investment even if it could be profitable for both parties.
THE UNIVERSITY OF BRITISH COLUMBIA Clicker Question 1 Venezuela-Exxon Holdup Problem a. The subgame perfect equilibrium outcome is to invest elsewhere. b. The outcome is inefficient in that both parties are worse off than they could be. c. Venezuela would gain if it could commit to non-expropriation. d. All of the above. e. None of the above.
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THE UNIVERSITY OF BRITISH COLUMBIA 2. Behavioral Game Theory Behavioral biases and limited (bounded) rationality play an important role in strategic games (and in many other situations). The study of these effects is called behavioural game theory. Some of the main points can be illustrated using the ultimatum game.
THE UNIVERSITY OF BRITISH COLUMBIA 3. The Ultimatum Game Proposer Responder Offer x Accept Reject 10 – x, x 0, 0 The proposer moves first and offers amount x to the responder. The responder can accept or reject. If the responder accepts, the responder gets x and the proposer gets 10 – x. If the responder rejects the offer, both get nothing. What is the Nash equilibrium? What do we expect to happen? What actually happens? Why?
THE UNIVERSITY OF BRITISH COLUMBIA Clicker Question 2 The inclination to reject positive offers in the ultimatum game can be understand as: a. The responder’s best response strategy. b. Difficulty in calculating fully rational solutions. c. The reciprocity norm. d. b. and c. e. All of the above.
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THE UNIVERSITY OF BRITISH COLUMBIA 4. The Beauty Contest Game: Levels of Reasoning Everyone chooses an integer between 0 and 100. The winner is the person whose choice is closest to 2/3 of the average of all numbers submitted. The important task in this game is to anticipate what others will do.
THE UNIVERSITY OF BRITISH COLUMBIA Clicker Question 3 Suppose there are 5 players. Suppose the numbers submitted are 10, 20, 30, 40, and 50. a. The winning submission is 30. b. This combination of submissions is a Nash equilibrium. c. If, Jane, the high bidder, could change her choice she would pick a number less than 20. d. All of the above. e. None of the above.
THE UNIVERSITY OF BRITISH COLUMBIA Outcomes in the Beauty Contest Game What is the Nash equilibrium? What do we expect to happen? What actually happens? Why? What would a well-informed person do?
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