Key Terms

Question 1

A risk-neutral individual…

Answer 1

… has a linear utility function, and is indifferent between gaining the expected value of a gamble for sure, and taking the gamble itself.

Question 2

A risk-averse individual…

Answer 2

… has a concave utility function, and prefers to receive the expected value of the gamble for sure than take on the gamble itself.

Question 3

A risk-loving individual…

Answer 3

… has a convex utility function, and prefers to take on the gamble itself than receive the expected value of the gamble for sure.

Question 4

Normal Form Games

Answer 4

strategic situations where the players must choose their actions simultaneously; one-shot game

Question 5

Extensive Form Games

Answer 5

dynamic strategic situations where players take actions sequentially; one-shot game

Question 6

Complete Information

Answer 6

All players know the rules of the game and each other’s payoffs for all possible outcomes

Question 7

Full Rationality

Answer 7

each player is willing and able to maximise their own payoffs

Question 8

Common Knowledge

Answer 8

each player knows that the other person knows the rules and payoffs, and are fully rational; each player knows that the other player knows this and so on

Question 9

A strategy is strictly dominated for a player whenever…

Answer 9

… there exists another strategy whose payoff is always strictly larger, regardless of what strategy the other player chooses

Question 10

Nash Equilibrium

Answer 10

a solution concept where no player has an incentive to change their strategy given the strategies played by all other players

Question 11

Mixed Strategy

Answer 11

a player selects their chosen strategy from a probability distribution

Question 12

Pure Strategy

Answer 12

a player selects a single strategy deterministically

Question 13

Grim Trigger Strategy

Answer 13

a player cooperates from the beginning, and keeps doing so unless the other player defects, in which case the player defects in every subsequent round forever more

Question 14

Joint Value

Answer 14

the efficient outcome sum of the players’ payoffs when they cooperate

Question 15

Private Information

Answer 15

information that only a subset of players know

Question 16

Moral Hazard

Answer 16

when one side of the market cannot observe all the actions of the other side of the market

Question 17

Adverse Selection

Answer 17

when one side of the market cannot observe the “types” on the other side of the market

Question 18

Participation Constraint (PC)

Answer 18

the payment schedule must prompt the agent to prefer exerting effort level x’ over taking their outside option

Question 19

Incentive Compatibility Constraint (ICC)

Answer 19

the payment schedule must prompt the agent to prefer exerting x’ over any other level of effort

Question 20

Take It Or Leave It

Answer 20

a contract where the principal sets the payment schedule in the form of a payment (B’) if and only if the agent puts in an effort of x’

Question 21

Sharecropping (aka. Revenue Sharing)

Answer 21

a contract where the agent’s payment is based on a fraction (m) of the revenue generated

Question 22

Franchising (aka. Renting)

Answer 22

a contract where the agent collects all the revenue, thus becoming the residual claimant

Question 23

External Validity

Answer 23

the ability to transfer experiment conclusions to a wider setting outside the experiment

Question 24

Natural Experiments

Answer 24

when some form of controlled setting occurs naturally, in a way that allows a researcher to carefully test a hypothesis

Question 25

Field Experiments

Answer 25

experiments designed such that subjects are undertaking tasks within their normal real-world environment, often without even knowing about the experiment

Question 26

Present Bias

Answer 26

being more impatient in the short-run than in the long-run

Question 27

Strategy

Answer 27

a complete contingent plan, describing which action a player
will choose in all potential situations

Question 28

Strategy Space

Answer 28

a list of all a player’s possible strategies

Question 29

Subgame Perfect Nash Equilibrium (SPNE)

Answer 29

a combination of strategies that ensures a Nash equilibrium in every subgame

Question 30

Subgame

Answer 30

a section of a game, starting at a node where there is no uncertainty, and ending at a terminal node

Question 31

Time-Consistency

Answer 31

when the relative evaluation of 2 identical payoffs depends only on the length of the delay between them, and is independent of the time when the evaluation is actually made