Co-ordination GAME:

Economic growth means all parties win but some win more than others i.e. Win Win
solution. The Nash equilibrium is a powerful tool to explain development economics.
Nash equilibrium is a stable equilibrium where all players doing their best assuming
others are doing the same and other players think in the same way. This is an
equilibrium where there is no incentive to deviate.

Battle of sex and stag hunt are coordination game.

Corruption Game: Coordination Game

Corruption game is a kind of a coordination game with two strategies. In this game,
people have to co operate to come up with a positive and non zero outcome. If
public official and business man coordinate, then they would end up with either in
cell one or cell iv.

Public Official

Business man Honest Corrupt

Honest 3,1 0,-2
Corrup -2,0 (business man is 1,3
t punished so -2, and as the
work is not permitted,
official loses, so 0 gain for
the official)
Cultural expectation is what determines the Nash equilibrium in other words they
can create the outcome where people will be honest or corrupt. If the culture of
corruption exists then corruption from both ends would yield the Nash equilibrium.

Culture of Corruption:

If business man is honest and the public official is corrupt, then the business man
gets 0<1

If business man is corrupt and the public official is honest, then the business man
gets -2<1

If public official is corrupt and business man is honest, then the official gets -2<3

If public official is honest and business man corrupt, then official gets 0<3

So we can see both benefits by being corrupt, when culture of corruption exists.
This is the nash equilibrium of the game. Official ends up with 3 and businessman
ends up with 1. In a culture of corruption, if they play honest, they both lose
compare to being corrupt in terms of economic benefit.
Similarly we can show if cultural expectation gravitates towards honesty, then the
nash equilibrium is the cell one.

 Characteristics of the Corruption Game:

1. Cultural expectation determines the nash equilibrium

2. Past trend may indicate which would be the outcome

3. One outcome may be preferred by the public official ( corrupt, corrupt)

another outcome may be preferred by the public official (honest , honest)

4. Nash equilibria cannot be pareto ranked i.e. it cannot be termed as pareto

superior. ( are they both pareto efficient?)

5. People have to coordinate in order to receive positive and non zero

outcome.

Stag Hunt Game |Migration Game:

James/hunter one

Mash/Hunter 2 Stag/ Go Hare (safe but small)/ Stay

Stag( large but 3,3 -2,0
dangerous)/Go
Hare/stay 0,-2 1,1

1. Co ordination game with two nash.

2. Symmetric payoffs

3. Here we have pareto improvement! (3,3<1,1), (3,3 is pareto superior)

mathematically 6>2

4. Catch the essence of strategic interdependence (safe but inferior) when

coordinated coopereation between players yields a superior
equilibrium( exciting and superior)
 5. Example of prisoners dilemma..individualic behavior produces an inferior
nash equilibrium while a superior outcome lies in cooperative game.

Games of Pure Coordination:

1. No pareto improvement, both are pareto efficient

Speak Bangla Speak English

Bangla 2,2 1,1,
English 1,1, 2,2,

HAWK DOVE GAME | Conflict over something:

 The common element in a hawk dove game is a conflict over scarce resource.

 The Nash equilibrium occurs with players doing different things. There are two
Nash equilibriums. It makes sense cause when we were studying co ordination
games, the equilibrium lies when they were doing the same things. So
generally in a game that is based on conflict, the equilibrium is achieved when
people are doing different things.

LANDLORD

Put Cows on the land Put Cows elsewhere

Live and -10.-10 5,-5
Work on
land
Live and -5,5 0,0
work
elsewhere
 How do we determine two Nash equilibriums?

1. Convention- which player posses the land first? If possessor play hawk, if
challenger dove.

That leads to two nash.

2. Players take different decisions in different situations.

3. Conventions prevent conflict (hawk, hawk) or economic waste (dove ,

dove)

4. Formal law emerges from convention

 Problems with Convention

1. Conflicting convention might create problem

2. Who is the rightful first possessor?

Prisoner’s Dilemma in Development Economics:

 Prisoner’s Dilemma investigates how individuals with rational behavior do

collectively irrational things because of their self interest.

 Prisoner’s dilemma occurs where the situation call for some collective
sacrifice. If sacrifice is made, then the total public benefit is more than the
sacrifice of the individual.

 Prisoner’s dilemma arises in co-operatives. Example. N players produces a

good worth of $10, where each gets $10/n, if some one slacks, he misses
$10/n, in other hand if one player makes $10 worth of goods, if he misses he
misses $10.So a member of the cooperative has an incentive to slack given
he finds an option between 10 and 10/n comparing to an individual worker.

 In P.D. , welfare of the group and welfare of the indivudal is in conflict.

 Talk is cheap in P.D/ Communication is worthless in one shot game

  Self interest leads to pareto inefficient outcome.

 Co-ordination failure leads to prisoner’s dilemma.

Solution:

• Reciprocity:

An implicit social contract.The threat of future punishment.

• Strong Government:

A system of penalties for defective behavior can turn prisoner’s dilemma into
a coordination game in which cooperative behavior can be a nash
equilibrium.

Person 1

Person 2 Restrain Cut Down

Cutting maximum
Restrain Cutting 3,3 -1,4
Cut Down maximum 4,-1 0,0

 Cut down max is the Nash equilibrium.

• If person 1 cut, br of person 2 cut (0>-1)

• If person 1 rc, br of person 2 cut (4>3)

• If person 2 cut, perspn 1 cut (0>-1)

• If person 2 rc, br of person 1 cut (4>3)

 The rule of Law:

Benefits of the rule of law:

1. Rule of law gives rights to possessions

2. Rights not to be kidnapped, enslaved, raped

3. It serves as a basis for the civil society.

4. All equal before the law.

5. Rule of law cannot be retroactive- retroactive means suppose people did

things in the past which were not crime at that time. But we can give
punishment for those things by labeling them as crime. Rule of law cannot
have this property.

6. Rule of law and rule of Government are not the same. Government is
supposed to implement rule of law. Without rule of law govt can become
tyrant so we need rule of law to protect us from Government.

Private property rights and market:

1. The economic incentive for all work is to accumulate private property. The
rule of law ensures that right. That in turn makes people productive.

2. Example: Product and asset market, Capital market, Labor Market.

3. The issue of private property arises where there is competition for land
and natural resources.

4. Allow market to exist

Problems:

5. Without rule of law, there will be anarchy, then people can only have what
he is able to defend.

6. Waste of resources as people will not be productive and use resource for
stupid things
 Ethical behavior and morality can be a substitute for rule of law.

Anarchy and Prisoner’s dilemma:

We can show when anarchy exists, prisoner’s dilemma exists in

simultaneous and sequential game.

Simultaneous Decision:

• When the rule of law doesn’t exist and neither does the moral behavior, what
we have essentially is the prisoner’s dilemma which is caused from anarchy.

Person 2 produces Person 2 steals

Person 1 produces 3,3 1,4
Person 1 produces 1,4 2,2

• Symmetric outcome in cell IV which is the nash equilibrium. It is the pareto

inefficient outcome.

• Dominant strategy leads to a pareto inefficient outcome.

 • As it is pareto efficient, a pareto improvement is possible.

How to achieve a Pareto improvement?

• Legal contact is not possible as anarchy exists already

• A self enforcing contact is self sustainable through self interest without

external enforcement. But self enforcement is not possible also as people
have the incentive to deviate if they find out other is producing.

So it is not possible in one shot game to achieve Pareto efficiency.

Sequential Decision:

• In sequential game , we see stealing is the best strategy simply because this
is the dominat strategy

• One player one makes the decision, it’s in his interest to achieve 4. So he will
not cooperate. But player 2 after seeing will not cooperate as well and end
up in 2,2 box.

So we see in the presence of a prisoner’s dilemma, self interested

behavior leads to a suboptimal behavior in both sequential game and
simultaneous game without the presence of rule of law.

Solution:

1. Repeated Games – People will cooperate given the game is repeated and
there is infinite repetitions. Then it will force self enforcing and self
sustainable equilibrium.

2. Reputations: people cooperate in small group. In large group people also

cooperate cause it is instinctive. People get utility from cooperation. Has a
similarity with bounder rationality instead of strict rationality.

3. As anarchy creates prisoner’s dilemma , we need government to enforce

rule of law. If government says there will be 2 penalty for stealing, then
given the penalty, the rational behavior would become is not to steal. But to
make this threat credible, govt has to need stuff like police. This is also
known as the paradox of gain from coercion
 4. Private Deterrence: It is a possible response to the threat of theft by
using personal resource. Protection through private deterrence is unequal.
It violates the rule of law as it is not equal. So it is more akin to anarchy
than to rule of law.

Anarchy with Strong & Weak:

People have different capabilities in the society. So there are strong and there are
weak. German philoshopher friedrich says that ethics was introduced in the world
by weak people to have protection from the strong. In a state of anarchy, the strong
will exert their will on weak,.

Potential Cost of Amount Net gain Utility from

Ouput appropriatio taken from leisure
n appropriatio
n
Weak 10 4
Strong 20 3 10 7
Source of inefficieny:

IF weak don’t work, strong loses 3. Weak loses 6

Strong seek to Strong do not seek to

appropriate appropriate
WEAK ARE PRODUCTIVE 0,27 10,20
WEAK ARE NOT 4,17 4,20
PRODUCTIVE

If week pr, sr br is appropriate

If weak not pr, sr br is not appropriate

If sr appropriate, wk br is not produce

If sr not appropriate,wk br is to produce

No equilibrium in pure strat, but nash eqm is in mixed strat.

To find the mixed strat nash, we need to find the probability. The mixed strat nash
is weak work with 30% and strong appropriate with 60%

Expected benefit of appropriation for weak is a function of what the weak do.

Lets say probability of working for weak is Pw

Expected payoff from appropriation: 27pw+ 17(1-pw)

Strong will certainly get: 20

Strong will be indifferent only when 27pw+ 17(1-pw)= 20

Pw=0.3

1-pw=0.7

Similarly weak’s expected benefit is a function of what strong do

Strong will seek to appropriate: Ps

Expected payoff from producing: Ps.0+(1-ps)10=4

Ps=0.6

1-ps=0.4

Weak productive =0.3 Weak not productive 0.7

Strong do not Strong do Strong do not Strong do
appropriate appropriate appropriate appropriate
1-ps=0.4 Ps=0.6 0.4 Ps=0.6

As these are independent event, so

The joint probability of

Weak productive & Strong do not appropriate=0.12 (Efficient

outcome, chance is less)

Weak productive & Strong do appropriate= 0.18 (inefficient)

Weak not productive & Strong do not appropriate=0.28

(inefficient)

Weak not productive & Strong do appropriate=0.42 (most likely)

Inefficiency:

• The mixed strat nash eqm predicts on an average, 20 will be gain

for strong and 4 will be gain for weak , so 24 total

• If rule of law were present, total would be 30 (10+20)

• So 6 is total loss
 • This 6 loss is the for the weak.

Solution:

In absence of rule of law , if strong promise not to approproiate, that threat is not
credible as if it appropriates it has more gain. So there is credibility issue.

Laziness:

The weak are not lazy as they are not working, rather they are responding rationally
to predatory behavior of strong.

Real solution lies in repeated Games, Specially we need to discuss Folk theorem ,
Grim trigger, Discount rate to understand this.

Roving and Stationary Bandits:

Roving- Predator who attacks only once. (More dangerous)

Stationary- Who attacks more than once.(Less dangerous)

We can say in a single shot game , weak are better of f being lazy. In a repeated
game however, we can see that there is incentive for both weak and strong to
achieve pareto improvement through bargaining.

If weak being productive, then weak can produce extra 6, (10-4) , which would be
shared by the weak and strong.

Stationary behavior of the bandit is sustainable as a self enforcing contact

Many pareto improvement distributions of this surplus is possible. This is also known
as folk theorem.

Folk theorem:
When people who meet in the repeated games, care sufficiently about the future,
there are infinitely many solutions are possible for repeated Games.

Repeated Games as Grim Trigger:

• If strong appropriate all the outputs, weak can change their actions from
being productive to become non productive for good.

• If weak share some surplus with the strong, then strong don’t have any
incentive to appropriate and weak have incentive to produce.

We can conclude by saying it depends on the repeated nature of the game

and player’s valuation about future. If the discount rate is low, then they
value the future more, so from a complete anarchy, a pareto improvement is
possible but but inferior to the pareto efficient outcome of the game.
 Public Goods and Prisoner’s Dilemma:

Trading is a positive sum game while stealing at best can be a zero sum
game.When we’re talking about public good, there is a possiblilty of
prisoner’s dilemma for the very nature of public good. Public good rests on
two features, joint supply and non exclusion. Joint supply creates the
environment of cooperation, where non exclusion creates the environment
where people tend to be individualistic.

Prisoner’s dilemma can be termed as hobbesian state of nature. To pull out of

this situation we need to do two things.

1. Establishing property rights

2. Personal behavior- ethics

Features of public good:

1. Joint Supply- Individuals cannot supply it, all have to contribute. According to
sameulsonian public good , each individual’s consumption leads to no
substraction from other individual’s consumption of that good.
 • This is a good that must be equally provided in quantities to all the
members.

• Each individual is better off if all contribute to the provision of

the public good than if all do not, and each is still better off if
only he does not play for the good.,

• Jointness of supply is a property of the production cost of the public

good. The extreme case is production cost is fixed and thus the
marginal cost is zero.

2. Non exclusion: When there is only fixed cost, then MC=0, then once supplied
its for all to consumne. Example national defence.

• Failure of the exclusion provides an incentive to individual to move

from 1 to 2 or 4.

So joint supply makes co operative collective decision beneficial to all.

Absence of exclusion tempts individual into independent and non cooperative
behavior.

However exclusion might be possible if we build a bridge.

To solve prisoner’s dilemma in public good, we rest on two properties:

1. Tit for tat: player plays the same strategy in the present game as the
other player played in the previous game, (pp-12, public choice) so
basically an imitation of the other player's strategy in the last period as
an action to be played in the present game

2. Taylor’s solution: What I get is if A defects , then B does not cooperate

temporarily before returning to cooperative behavior.

Number might affect the solution.

Taylor says that cooperation can arise in prisoner’s dilemma,but cooperation in

large number of player is less likely comparing to smaller number of player.
 Coordination game in public goods:

Coordination game has inherent stability.

Strategy A Strategy B
Strategy A a,a 0,0
Strategy B 0,0 b,b

IF b>a, players have clear preference

If b=a, then we’ve to go for backward induction, we go for it as we have incomplete

information that which player will pick which strategy.

A player can remember only finite number of action. For last 5 times, he played A 3
times and B 2 times, she got rewarded for playing A two times, which implies she
got a 2 times (2/3), and she got rewarded for B playing one time means she got b
once (1/2) –Assuming no other information about payoffs from the diffenent strats,
choice the other player has made in the past, and the current choice of the player.

If other player also does the same, then two players coordinate over the time.

Adaptive learning: choice depends on the payoff that she received in the recent
past.

Envelope theorem: When exogenous variable changes, the equilibrium changes as

well.

Evolution of cooperation is created. To provide public good.

Conclusion?