Key Terms Flashcards
A risk-neutral individual…
… has a linear utility function, and is indifferent between gaining the expected value of a gamble for sure, and taking the gamble itself.
A risk-averse individual…
… has a concave utility function, and prefers to receive the expected value of the gamble for sure than take on the gamble itself.
A risk-loving individual…
… has a convex utility function, and prefers to take on the gamble itself than receive the expected value of the gamble for sure.
Normal Form Games
strategic situations where the players must choose their actions simultaneously; one-shot game
Extensive Form Games
dynamic strategic situations where players take actions sequentially; one-shot game
Complete Information
All players know the rules of the game and each other’s payoffs for all possible outcomes
Full Rationality
each player is willing and able to maximise their own payoffs
Common Knowledge
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
A strategy is strictly dominated for a player whenever…
… there exists another strategy whose payoff is always strictly larger, regardless of what strategy the other player chooses
Nash Equilibrium
a solution concept where no player has an incentive to change their strategy given the strategies played by all other players
Mixed Strategy
a player selects their chosen strategy from a probability distribution
Pure Strategy
a player selects a single strategy deterministically
Grim Trigger Strategy
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
Joint Value
the efficient outcome sum of the players’ payoffs when they cooperate
Private Information
information that only a subset of players know
Moral Hazard
when one side of the market cannot observe all the actions of the other side of the market
Adverse Selection
when one side of the market cannot observe the “types” on the other side of the market
Participation Constraint (PC)
the payment schedule must prompt the agent to prefer exerting effort level x’ over taking their outside option
Incentive Compatibility Constraint (ICC)
the payment schedule must prompt the agent to prefer exerting x’ over any other level of effort
Take It Or Leave It
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’
Sharecropping (aka. Revenue Sharing)
a contract where the agent’s payment is based on a fraction (m) of the revenue generated
Franchising (aka. Renting)
a contract where the agent collects all the revenue, thus becoming the residual claimant
External Validity
the ability to transfer experiment conclusions to a wider setting outside the experiment
Natural Experiments
when some form of controlled setting occurs naturally, in a way that allows a researcher to carefully test a hypothesis
Field Experiments
experiments designed such that subjects are undertaking tasks within their normal real-world environment, often without even knowing about the experiment
Present Bias
being more impatient in the short-run than in the long-run
Strategy
a complete contingent plan, describing which action a player
will choose in all potential situations
Strategy Space
a list of all a player’s possible strategies
Subgame Perfect Nash Equilibrium (SPNE)
a combination of strategies that ensures a Nash equilibrium in every subgame
Subgame
a section of a game, starting at a node where there is no uncertainty, and ending at a terminal node
Time-Consistency
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
