14.

11 Problem Set 5
Fall 2014
Due on November 21st. If you are working with a partner, you and your partner may turn in a
single copy of the problem set. Please show your work and acknowledge any additional resources
consulted.

NOTE: THESE SOLUTIONS HAVE m AS THE PROBABILITY THAT THE

CONTROLLER SWITCHES, INSTEAD OF THE PROBABILITY OF NOT
SWITCHING, AS WAS ORIGINALLY STATED. PLEASE KEEP THIS IN
MIND WHEN CHECKING YOUR ANSWERS.
1. Market Entry Game
W U
(a) E (−50, 0) (30∗, 30∗)
N (0∗, 100∗) (0, 100∗)
We find that by the starring method the two NE are (N, W) and (E, U).
(b) First the entrant decides E or N, then the incumbent decides W or U.
Suppose the entrant has chosen E, then in this subgame the incumbent must choose
U as their optimal decision as (E, U) is preferred to (E, W) by the incumbent.
This implies (N, W) is not subgame perfect. (E, U) is the only SPNE.

2. Prisoners Dilemma Repeated

(a) Suppose we reach a subgame where the opponent has defected in the previous
round. If I defect in this round as my strategy dictates then my opponent will
defect in the next round, I will defect in the following round as such we will defect
then cooperate every two rounds. Alternatively if I deviate to cooperate we shall
cooperate every round. If it was not beneficial for me to deviate and defect when
we were both cooperating, then it follows that it would not be beneficial to defect
here. Since the previous situation was a NE, it is beneficial to cooperate here
instead implying that TFT is not a SPNE.
(b) Suppose at least one player has defected, the strategy now dictates to always
defect. Given that I know my opponent will always defect I have no incentive to
deviate and to cooperate as my opponent will continue defecting. Note that this
is the only possible sub game that doesn’t involve all cooperating. As such Grim
Trigger is a SPNE as in any subgame there is no incentive to deviate.

3. Commission

Consider a game involving three players: a controller and two witnesses, called witness
1 and witness 2. An out-of-control trolley is careening down the track toward the
controller’s car. The controller has the option to divert the trolley so that the trolley
instead hits a repairman on a second track. The two witnesses observe the outcome
and have the option to punish the controller. This scenario is depicted in the image
below:

1
We make the following assumptions regarding players’ payoffs. For a witness, we as-
sume that it is costly to punish when the other witness is not punishing, and it is
likewise costly not to punish when the other witness is punishing. This can be modeled
as a simple coordination game. Suppose that each witness receives payoff 0 if they
coordinate (either both punish the controller or both do not punish the controller),
and each witness receives payoff −1 if they mis-coordinate (one witness punishes the
controller but the other does not).

(a) We will consider the point of view of a witness, treating the different controller
actions as different states of the world. The state space, Ω, is therefore:

Ω = didn’t switch,

switched tracks

In this (very simple, so far) setup, the witnesses’ partitions are:

π1 = π2 = {{didn’t switch}, {switched tracks}}.

What are the strategies available to each witness?

Answer. A strategy for each witness is si : Ω → {Punish, Don’t Punish}. For

example, the strategy profile where witness choose to punish whenever the operator
switches tracks is given by

si (didn’t switch) = Punish, si (switched tracks) = Punish,

for i ∈ {witness 1, witness 2}. Therefore, there are four strategies: to always pun-
ish, to punish when the operator switched tracks, to punish when the operator did
not switch tracks, and to never punish.

(b) Assume both witnesses anticipate that the controller lets the trolley continue to-
wards his car with some probability, which we denote by the parameter m. Wit-
nesses share a prior over these states: µ(didn’t switch) = 1−m and µ(switched tracks) =
m. Show that for any m, there is a Bayesian Nash equilibrium of this game for
each witness to punish the controller if and only if the controller switched tracks.
Answer. Assume both players punish if the controller switches tracks. They get
payoff 0. Since this is the maximal payoff attainable, there can be no profitable
deviation.

Now suppose that the controller is choosing whether or not to flip the switch.
Suppose that his payoffs are as follows: The controller receives payoff −1 if his car
is hit, and he receives payoff −1 for each witness that punishes him.

2
(c) (∗) Now suppose that the controller is choosing whether or not to flip the switch.
Suppose that his payoffs are as follows: The controller receives payoff −1 if his
car is hit, and he receives payoff −1 for each witness that punishes him. If the
operator believes that both witness 1 and witness 2 will punish him if and only if
he flips the switch, will he choose to flip the switch? Argue that we can re-write
the game as an extensive game with complete information, and show there is a
Subgame Perfect equilibrium where the controller does not flip the switch, and if
he does both players punish him.

Answer. The strategy profile is given by sO (∅) = Don’t Switch),

si (Don’t Switch) = Don’t Punish, si (Switch) = Punish for i ∈ {w1, w2}.

We show it is an SPE using backwards induction. At the second stage, when the
operator switched tracks, it is a NE for both witness to punish. Therefore, if he
chooses to Switch, the operator obtains payoff -2. Because Don’t Switch yields
payoff -1, he does not have a profitable deviation. This show the strategy profile
is a Nash equilibrium of the original game, and hence a NE of every subgame, so
it is a SPE.

Now, let’s make the problem somewhat more realistic. Sometimes, the controller isn’t
paying attention, so he doesn’t switch tracks even if he would choose to had he been
paying attention. In particular, let’s assume the controller is paying attention with
probability 12 . We again assume that, if the controller is paying attention, both wit-
nesses anticipate that he lets the trolley continue towards his car with some probability,
which we denote by the parameter m.
Moreover, when the controller is paying attention, the witnesses sometimes see that he
is paying attention (perhaps they can see him reach out for the lever and hesitate, or
perhaps they observe his gaze). We assume that when the controller is paying attention
and he didn’t switch tracks, each witness can separately tell that the controller was
paying attention with probability 52 . It is possible that one witness can tell but the
other cannot. However, if the controller switched tracks, he must have been paying
attention, in which case both can tell with probability 1.

(d) Now, the state space Ω is:


Ω = wasn’t paying attention, didn’t switch,
was payingattention, didn’t switch, neither witness observed gaze,
was payingattention, didn’t switch, only witness 1 observed gaze,
was payingattention, didn’t switch, only witness 2 observed gaze,
was payingattention, didn’t switch, both witnesses observed gaze,

switched tracks

Write down the partitions π1 and π2 for witness 1 and witness 2, respectively.

3
 Answer. A witness can’t tell states in which the controller is paying attention
but the witness doesn’t observe his gaze from states in which the controller isn’t
paying attention. She also can’t tell states in which the other witness observes
the controller’s gaze from ones in which the other witness does not observe the
controller’s gaze. The witnesses’ partitions are thus:


π1 = {wasn’t paying attention, didn’t switch,
was paying attention, didn’t switch, neither witness observed gaze,
was paying attention, didn’t switch, only witness 2 observed gaze},
{was paying attention, didn’t switch, only witness 1 observed gaze,
was paying attention, didn’t switch, both witnesses observed gaze},

{switched tracks}


π2 = {wasn’t paying attention, didn’t switch,
was paying attention, didn’t switch, neither witness observed gaze,
was paying attention, didn’t switch, only witness 1 observed gaze},
{was paying attention, didn’t switch, only witness 2 observed gaze,
was paying attention, didn’t switch, both witnesses observed gaze},

{switched tracks}

(e) What is witnesses’ shared prior over these states, as a function of m?

Answer. For this solution, it is helpful to introduce the following shorthand no-
tation for the probability of observing each state:

p1 = wasn’t paying attention, didn’t switch,

p2 = was paying attention, didn’t switch, neither witness observed gaze,
p3 = was paying attention, didn’t switch, only witness 1 observed gaze,
p4 = was paying attention, didn’t switch, only witness 2 observed gaze,
p5 = was paying attention, didn’t switch, both witnesses observed gaze,
p6 = switched tracks

The probabilty the witness is paying attention is q = 1/2. From this, we learn:

p2 + p3 + p4 + p5 + p6 = q = 1/2 (1)

and p1 = 1−q = 1/2. The probability the controller switches given that he’s paying
attention is m. From this, we learn:
p6 p6
= =m (2)
p2 + p3 + p 4 + p5 + p6 1−q

4
 The probability the witnesses observe the controller’s gaze given that the controller
is paying attention is r = 2/5. From this we learn:
p2
= (1 − r) · (1 − r) = 9/25 (3)
p2 + p3 + p 4 + p5
p3
= r · (1 − r) = 6/25 (4)
p2 + p 3 + p4 + p5
p4
= r · (1 − r) = 6/25 (5)
p2 + p 3 + p4 + p5
p5
= r · r = 4/25 (6)
p 2 + p3 + p4 + p5
This leaves us with six equations and six unknowns, so we may now solve for the
priors as a function of m. When we solve these equations, we find, in terms of m:

1
p1 =
2
9
p2 = (1 − m)
50
6
p3 = (1 − m)
50
6
p4 = (1 − m)
50
4
p5 = (1 − m)
50
m
p6 =
2
(f) What are the strategies available to the witnesses now?

Answer. Each strategy si for player i must have si (ω) = si (ω 0 ) if ω and ω 0 are in
the same part. Therefore, player i has 8 possible strategies, given by whether he
punishes when the operator does not switch tracks, and whether:
i. To punish whenever the operator switches tracks
ii. To punish whenever the operator switches tracks but she cannot tell whether
he was paying attention
iii. To punish whenever the operator switches tracks and she can tell he was paying
attention
iv. To never punish when the operator switches tracks.
(g) Set m = .5. Show that it is still a Bayesian Nash equilibrium of this game for each
witness to punish the controller only in the state where the controller switched
tracks.

Answer. As before, witnesses’ expected payoff if they don’t deviate is 0. This is

the highest possible payoff, so neither can benefit by deviating from their strategy
(and this does not depend on m).

5
 (h) How does your answer change if m = .001? Interpret this result. Prove that, for
any value of m, it is still a Bayesian Nash equilibrium of this game for each witness
to punish the controller if and only if the controller switched tracks.

Answer. The answer to 3g does not depend on m. The reason is that they are
conditioning their action on whether the operator switched tracks: independently
of the prior probability m, the posterior probability each player assigns to the
event that the operator switched tracks is 1.

(i) (∗) Describe the game now as an extensive form game with incomplete informa-
tion, where the operator chooses whether to switch tracks or not. Show that there
is a Perfect Bayesian equilibrium where each witness punishes the controller if
and only if the controller switched tracks, and the controller chooses not to switch
tracks (you have to find the assessment).

Answer. The histories, player function and actions are described as follows:
• The empty history ∅
• The histories where Chance chooses whether the Controller is paying attention
or not
• If the controller is paying attention, the histories where the Controller decides
between Switch and Don’t Switch
• If the controller is paying attention, the histories where Chance chooses whether
witness 1 observes the gazes, and whether witness 2 observes the gaze
• Finally, the histories where witness 1 and witness 2 decide to Punish or Don’t
Punish
First, let’s check that the strategy profile is sequentially rational. Note that con-
ditional on the operator switching or not switching tracks, there is no uncertainty
for the witnesses, and therefore the assessment is irrelevant to check sequential
rationality.

The strategy for each witness is sequentially rational, because both are obtaining
the highest possible payoff of 0 already. This is independent of any assessment!

Now, let’s check whether the controller has a profitable deviation. If he deviated,
he would punished and get -2. Therefore he prefers not to deviate, which has
payoff -1.

Note that in this case the Perfect Bayesian equilibrium does not add anything
over the Subgame Perfect equilibrium, because the witnesses are conditioning their
strategies on events which both can observe whenever they happen.

4. Omission

6
Next, we modify the above situation in just one way: we change which track the trolley
his headed down. Now, when the controller is not paying attention, the worker is
injured by mistake. This situation is presented in the figure below:

We retain all features of problem 3: the controller is paying attention with probabil-
ity 12 ; if the controller is paying attention, both witnesses anticipate that he lets the
trolley continue towards the repairman with some probability, which we denote by the
parameter 1 − m; and, when the controller is paying attention, each witness can sepa-
rately tell that the controller was paying attention with probability 25 . Notice that the
interpretation of 1 − m is different: now it is the likelihood the controller acts badly,
whereas in problem 3 it was the likelihood he does good.

[Remark: if in some of the following questions, the answer is the same as in Problem
3, you do not need to write everything again but can simply say they are the same].

(a) Write down the state space. Then write down the partitions π1 and π2 for witness
1 and witness 2, respectively.

Answer. The state space is still:


Ω = wasn’t paying attention, didn’t switch,
was payingattention, didn’t switch, neither witness observed gaze,
was payingattention, didn’t switch, only witness 1 observed gaze,
was payingattention, didn’t switch, only witness 2 observed gaze,
was payingattention, didn’t switch, both witnesses observed gaze,

switched tracks

However, the interpretation of the state space changes: now it’s paying attention
and not switching that is worthy of punishment. The partitions π1 and π2 are also
the same.

(b) What are witnesses’ priors over these states, as a function of m?

Answer. The priors are the same, though, once again, the interpretation is dif-
ferent since m is now the probability the controller does a bad act, as opposed to
a good one, as noted in the problem.

(c) What are the strategies available to each witness?

Answer. The strategies are the same as in problem 3.

7
 (d) Suppose that m = .5. Show that there is no Bayesian Nash equilibrium of this
game in which each witness punishes the controller if and only if the witness can
tell that the controller was paying attention and did not switch tracks.

Answer. Witnesses’ payoffs from this strategy are (p1 + p2 + p5 + p6 ) · 0 + (p3 + p4 ) ·

12 6
(−1) = − 50 (1 − m) = − 50 , which we calculate by considering the states in which
players successfully coordinate. Let us suppose the deviation for witness 1 in which
she never punishes. Then, her payoff is (p1 + p2 + p3 + p6 ) · 0 + (p4 + p5 ) · (−1) =
− 10
50
(1 − m) = − 101
. She therefore benefits from deviating.

(e) Now suppose that m = .999. How does your answer to question 4d change? How
about any arbitrary m? Interpret this result.

Answer. Witnesses’ payoffs from this strategy are (p1 + p2 + p5 + p6 ) · 0 + (p3 + p4 ) ·

12
(−1) = − 50 (1 − m) = −0.00024, which we calculate by considering the states in
which players successfully coordinate. Let us suppose the deviation for witness 1 in
which she never punishes. Then, her payoff is (p1 +p2 +p3 +p6 )·0+(p4 +p5 )·(−1) =
− 10
50
(1 − m) = −0.0002. She therefore benefits from deviating.

Indeed, this is true for any m.

(f) (∗) Describe the game now as an extensive form game with incomplete informa-
tion, where the operator chooses whether to switch tracks or not. Show that there
is a Perfect Bayesian equilibrium where the operator switches tracks when he is
paying attention, and witnesses punish him whenever he does not switch tracks.

Answer. For the description of the game, see the answer to 3i.

To show the strategy profile is PBE, we will follow the same reasoning as in 3i.
The witness do not have a profitable deviation because they are already obtaining
the maximal payoff. The controller obtains -1 by sticking to the strategy, and
by deviating he would obtain -2. Therefore the strategy profile is sequentially
rational. As we argued in 3i, this is true for any assessment, and so the strategy
profile is PBE.

5. Taking stock

(a) Suppose the controller’s sole job is monitoring the tracks when repairman are on
duty, so that the probability that he was paying attention is quite high. How does
this change your previous answers?

Answer. The answer depends on whether the witnesses are able to observe that
the controller is paying attention better [responses should be graded as correct if
they are coherent given their assumptions].

8
 If the probability that the controller is paying attention is very high (say, .9), but
the witnesses cannot observe this any better, then punishing the controller when-
ever he didn’t switch but was paying attention is not a BNE - indeed we proved
this in 4e.

On the other hand, suppose that because witnesses know that the controller should
be paying attention, they can observe him better. In particular, suppose that with
probability .9 both observe him when he is paying attention (and with probability
.1 neither does). In this case, it is a BNE to punish the controller whenever he
was paying attention and switched.

(b) Imagine that instead of punishing the controller, the witnesses are helping their
crew decide whom to hire as a track safety supervisor. Would you expect the wit-
nesses’ behavior to differ meaningfully between the commission scenario described
in question 3 and the omission scenario described in question 4? Why or why not?

Answer. Now the witnesses do not need to coordinate on their punishment, be-
cause their advice will be given privately. Because of this, witnesses can condition
their advice on their private information, i.e. whether the controller was paying at-
tention. For example, they might not want to recommend a controller who was not
paying attention, or a controller who was paying attention but let the repairman
get hit.
6. Other applications
(a) I list out an example there are other ways to approach the problem as well: There
is a q probability of a commission and a r probability of an accidental commission.
No act committed, 1-q
Act committed accident, qr
Act committed intentional, q(1-r)
Since the witnesses can only differentiate between act committed and no act com-
mitted if they intend to punish willful commission they must also punish unin-
tended commission.
(b) We are using commission again as our target example:
No act committed, 1 − q
Act committed both witnesses unaware of harm by product, qe2
Act committed witness 1 unaware of harm by product, qe(1 − e)
Act committed witness 2 unaware of harm by product, qe(1 − e)
Act committed witnesses 1 and 2 aware of harm by product, q(1 − e)2
This then reduces to the original problem of ommission not being punishable under
certain conditions.
(c) Similar to the previous section if the harm is done indirectly it is possible the
other witness may not observe the harm or may be unclear as to the perpetrators
intentions. I use the same model as before to show that the witnesses may be
uncertain as to the other witnesses observations.