Week 9-10 - Uncertainty and Information

Question 1

what are two ways for individuals to deal with external risk?

Answer 1

• diversification

- risk pooling

Question 2

what is diversification?

Answer 2

the spreading of risk; opting for a large number of small risks

Question 3

what is risk pooling?

Answer 3

spreading risk across multiple players to reduce your share of a large risk

Question 4

how can a subsidization agreement work?

Answer 4

1) the outcomes for the parties are publicly observable

2) there is a way to enforce the contract

Question 5

how to create asymmetric information in a game?

Answer 5

manipulate the other player’s information about your abilities and payoffs to affect the game outcome

Question 6

good info in a strategic interaction?

Answer 6

if others knew this info, they would alter their actions in a way that would inc your payoff

Question 7

bad info in a strategic interaction?

Answer 7

info that, when revealed, makes other players act in a way that will lower your payoffs

Question 8

what is signal jamming?

Answer 8

confusing your opponent by convincing them that your info is good not bad

Question 9

what is an incentive scheme?

Answer 9

a strategy that attempts to influence an unobservable of another player

Question 10

what is cheap talk?

Answer 10

communicating information that has no associated costs

Question 11

what is the cheap talk equilibrium?

Answer 11

the equilibrium from rolling back after using cheap talk to align your interests w that of your opponent

Question 12

signaling in a constant / zero sum game?

Answer 12

players should never give away private info because their preferences are in direct opposition

Question 13

babbling equilibria?

Answer 13

all communication in zero/constant sum games are disregarded bc players will not think they are credible

Question 14

how a player should determine whether to believe info given or not?

Answer 14

the player must decide the other’s utility function and see how it interacts with their own

Question 15

signals if players’ utility functions are perfectly positively correlated?

Answer 15

the player should act as if the signal received is true

Question 16

signals if players’ utility functions are perfectly negatively correlated?

Answer 16

the player should act as if the signal received is false

Question 17

if the cost of a signal is directly related to the private info conveyed by the signal?

Answer 17

the signal is evidence that supports how true it is

Question 18

participation constraints?

Answer 18

n must not be so high that students just decide to choose their alternative

Question 19

incentive compatibility constraints?

Answer 19

n (number of courses) must be:

a) high enough to disincentivise C-types from trying to pass as A-types
b) low enough not to disincentivise A-types from taking high courses

Question 20

for participation constraints to work?

Answer 20

players must want to signal and we want them to earn more from signaling than from their alternative option

Question 21

when does a separating equilibrium exist?

Answer 21

when both participation and incentive-compatibility constraints exist such that players can signal their type only if their info is true

Question 22

what does the separating equilibrium do?

Answer 22

causes separation of types / self-selection

Question 23

what do we call it when someone’s payoff is decreased by the cost of signalling?

Answer 23

negative externality

Question 24

what is the pooling equilibrium?

Answer 24

when the only equilibrium available is one where no signaling is possible and all types are treated alike

Question 25

in a market with a separating equilibrium, those who do not signal are assumed to have ___ info?

Answer 25

bad information

Question 26

what are moral hazard problems?

Answer 26

situations in which there is an efficiency loss due to people’s incentives not to consider the utility of other players

Question 27

what is a game of perfect information?

Answer 27

if only one player moves at a time and if each players knows every action of the other players who moved before her before at every point

Question 28

when is there a refinement of NE that removes non-credible threats?

Answer 28

when the SPNE matches one of the NEs we found from the game table

Question 29

what does it mean when the SPNE matches one of the NEs we found from the game table?

Answer 29

there is a refinement of NE that removes non-credible threats

Question 30

when is something a non-credible threat?

Answer 30

when something is a mutual best response (NE from table) but is not the SPNE

Question 31

what happens when a player uses a non-credible threat?

Answer 31

they say they are going to play something, but do not (to trick the other player). the strategy that includes the action that is a non-credible threat cannot be trusted.

Question 32

what does the SPNE do to non-credible threats?

Answer 32

it removes them

Question 33

what is the equilibrium selection problem?

Answer 33

there are multiple NE and the NE concept is silent on which will be played