Chapter 1 Reading Notes Flashcards
define nash equilibrium
mutual best response
a mutual strategy for both players that is satisfactory
a law that no one would want to break even in the absence of law or an external police force
define tragedy of the commons
a coordination problem in which self-interested individuals act independently and deplete a resource, lowering payoffs for all
who came up with ‘tragedy of the commons’ and when was this?
Garret Hardin in 1968
he called this a rebuttal to ‘the invisible hand’
what is ‘the invisible hand’?
competitive exchange of good to coordinate the actions of people resulting in people being guided subconsciously via incentives
what are examples of coordination problems?
‘how do we sustain the global environment?’
‘how do we move around the city without overcrowding the streets and causing congestion?’
how could coordination problems be solved?
through people internalising their actions and its externalities
through changing institutions
define ‘external effects’
occurs when someone’s independent action results in suboptimal payoffs for others
externalities
define institutions
laws, rules & conventions which regulate how others interact with one another
what are examples of institutions?
laws enforced
mutual expectations
social pressures
does game theory focus on strategic interactions?
yes
define strategic interactions
when participants’ outcomes depend on each others’ actions
mutual dependence, recognised
what is a ‘set’?
a collection of things
what are the components of a game
players
strategy sets
strategy profiles
order of play
information
payoffs
define players in a game
individuals or organisations represented as a single actor choosing a course of action
define strategy sets
a list of every possible course of action for each individual
define strategy profile
the course of action and its outcome for an individual is their strategy profile
define order of play
a game can be simultaneous or sequential
a player may or may not know what their opponent has done
define information in a game
a game specifies who knows what, when they know it, do others know what they know etc.
define payoffs in a game
numbers are assigned to each possible outcome for each player
a player chooses a course of action with the highest number
define cooperative game
a strategic interaction in which the players’ choice of strategy is subject to a binding agreement
define solution concept
a rule for predicting the outcome of a game
how a game will be played
define dominant strategy
a strategy is dominant if it yields the highest payoff for a player regardless of others’ actions
define dominant strategy equilibrium
a strategy profile in which all players play a dominant strategy
define equilibrium
a situation that is stationary in the absence of external change
a predicted outcome
define best response
a strategy is a player’s best response to the strategies adopted
by others if no other strategy available would result in higher payoffs
pareto efficiency = ?
when an economy has its resources and goods allocated to the maximum level of efficiency
no changes can be made without making someone worse off
pareto inefficiency = ?
an outcome that leaves at least one person better off without making anyone worse off
pareto superior = ?
when at least one player is better off without anyone being worse off
prisoner’s dilemma = ?
an interaction that in which there is a unique nash equilibrium, but there’s another outcome that gives a higher payoff to both players
therefore the nash equilibrium isn’t pareto efficient
rational agent = ?
someone who will choose their best option
economic rent = ?
the difference between the payoff they’d get if they cooperated and the next best alternative
fallback position = ?
the payoff a player receives in their next best alternative
(if they don’t cooperate)
assymetric information = ?
when one person knows information but the other person doesn’t
verifiable information = ?
information that can be used to enforce a legal contract or other agreement
credible information
invisible hand game = ?
invisible hand game has a single nash equilibrium that is pareto efficient
strategic complementarity = ?
when the payoff to playing a particular strategy increases as more people adopt/copy that strategy
incentive to get more people on board
assurance game = ?
pareto inefficient interaction
a two-player symmetric, strategic interaction with 2 strict nash equilibria, one of which is pareto superior to the other
disagreement game = ?
a game in which there are two or more pareto-efficient nash equilibria that are ranked differently by the players
this results in two players preferring two different equilibria
path dependence = ?
a process is path dependent if the most likely state of something depends on its state in recent periods
poverty trap = ?
when identical people may experience either an adequate living standard or poverty depending on circumstances, not their attributes
group inequality = ?
economic differences between sets of people distinguished by a common attribute (e.g., gender, age, race)
