ECON 159 - Lecture 13 - Sequential Games: Moral Hazard, Incentives, and Hungry Lions

Lecture 13 - Sequential Games: Moral Hazard, Incentives, and Hungry Lions

Overview

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.

Resources

Assignment

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

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

Course Media

Transcript

html

Audio

mp3

Low Bandwidth Video

mov [100MB]

High Bandwidth Video

mov [500MB]