13. Sequential games: moral hazard, incentives, and hungry lions

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Game Theory (ECON 159)

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.

00:00 - Chapter 1. Sequential Games: Backward Induction
17:57 - Chapter 2. Sequential Games: Moral Hazard
29:50 - Chapter 3. Sequential Games: Incentive Design
44:29 - Chapter 4. Sequential Games: Commitment Strategies
01:01:06 - Chapter 5. Sequential Games: Backward Induction Is Really Important

Complete course materials are available at the Open Yale Courses website: http://open.yale.edu/courses

This course was recorded in Fall 2007.