Lecture 13 - Sequential games: moral hazard, incentives, and hungry lions

author: Benjamin Polak, Department of Economics, Yale University
recorded by: Yale University
published: Nov. 15, 2010,   recorded: September 2007,   views: 3542
released under terms of: Creative Commons Attribution No Derivatives (CC-BY-ND)
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Description

We consider games in which players move sequentially rather than simultaneously, starting with a game involving a borrower and a lender. We analyze the game using "backward induction." The game features moral hazard: the borrower will not repay a large loan. We discuss possible remedies for this kind of problem. One remedy involves incentive design: writing contracts that give the borrower an incentive to repay. Another involves commitment strategies; in this case providing collateral. We consider other commitment strategies such as burning boats. But the key lesson of the day is the idea of backward induction.

Reading assignment:

Strategies and Games: Theory And Practice. (Dutta): Chapter 11

Strategy: An Introduction to Game Theory. (Watson): Chapter 2

Resources:

Blackboard Notes Lecture 13[PDF]

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