Game Theory for Applied Economists

by Robert Gibbons

Overview

An introduction to one of the most powerful tools in modern economics

Game Theory for Applied Economists introduces one of the most powerful tools of modern economics to a wide audience: those who will later construct or consume game-theoretic models. Robert Gibbons addresses scholars in applied fields within economics who want a serious and thorough discussion of game theory but who may have found other works too abstract.

Gibbons emphasizes the economic applications of the theory at least as much as the pure theory itself; formal arguments about abstract games play a minor role. The applications illustrate the process of model building—of translating an informal description of a multi-person decision situation into a formal game-theoretic problem to be analyzed. Also, the variety of applications shows that similar issues arise in different areas of economics, and that the same game-theoretic tools can be applied in each setting. In order to emphasize the broad potential scope of the theory, conventional applications from industrial organization have been largely replaced by applications from labor, macro, and other applied fields in economics.

The book covers four classes of games, and four corresponding notions of equilibrium: static games of complete information and Nash equilibrium, dynamic games of complete information and subgame-perfect Nash equilibrium, static games of incomplete information and Bayesian Nash equilibrium, and dynamic games of incomplete information and perfect Bayesian equilibrium.

Product Details

ISBN-13:	9781400835881
Publisher:	Princeton University Press
Publication date:	07/13/1992
Sold by:	Barnes & Noble
Format:	eBook
Pages:	288
File size:	5 MB

About the Author

Robert Gibbons is professor of organizational economics and the Sloan Distinguished Professor of Management at the Massachusetts Institute of Technology. He is the coeditor of The Handbook of Organizational Economics (Princeton).

Table of Contents

1 Static Games of Complete Information 1
1.1 Basic Theory: Narmal-Form Games and Nash Equilibrium 2
1.1.A Normal-Form Representation of Games 2
1.1.B Iterated Elimination of Strictly Dominated Strategies 4
1.1.C Motivation and Definition of Nash Equilibriuin 8
1.2 Applications 14
1.2.A Cournot Model of Duopoly 14
1.2.B Bertrand Model of Duopoly 21
1.2.C Final-Offer Arbitration 22
1.2.D The Problem of the Commons 27
1.3 Advanced Theory: Mixed Strategies and Existence of Equilibriutn 29
1.3.A Mixed Strategies 29
1.3.B Existence of Nash Equilibrium 33
2 Dynamic Games of Complete Information 55
2.1 Dynamic Games of Complete and Perfect Information 57
2.1.A Theory: Backwards Induction 57
2.1.B Stackelberg Model of Duopoly 61
2.1.C Wages and Employment in a Unionized Firm 64
2.1.D Sequential Bargaining 68
2.2 Two-Stage Games of Complete but Imperfect Information 71
2.2.A Theory: Subgame Perfection 71
2.2.B Bank Runs 73
2.2.C Tariffs and Imperfect International Competition 75
2.2.D Tournaments 79
2.3 Repeated Games 82
2.3.A Theory: Two-Stage Repeated Games 82
2.3.B Theory: Infinitely Repeated Games 88
2.3.C Collusion between Cournot Duopolists 102
2.3.D Efficiency Wages 107
2.3.E Time-Consistent Monetary Policy 112
2.4 Dynamic Games of Complete but Imperfect Information 115
2.4.A Extensive-Form Representation of Games 115
2.4.B Subgame-Perfect Nash Equilibriuin 122
3 Static Games of Incomplete Information 143
3.1 Theory: Static Bayesian Ganies and Bayesian Nash Equilibrium 144
3.1.A An Example: Cournot Competition under Asymmetric Information 144
3.1.B Normal-Form Representation of Static Bayesian Games 146
3.1.C Definition of Bayesian Nash Equilibrium 149
3.2 Applications 152
3.2.A Mixed Strategies Revisited 152
3.2.B An Auction 155
3.2.C A Double Auction 158
3.3 The Revelation Principle 164
4 Dynamic Games of Incomplete Information 173
4.1 Introduction to Perfect Bayesian Equilibrium 175
4.2 Signaling Games 183
4.2.A Perfect Bayesian Equilibrium in Signaling Games 183
4.2.B Job-Market Signaling 190
4.2.C Corporate Investment and Capital Structure 205
4.2.D Monetary Policy 208
4.3 Other Applications of Perfect Bayesian Equilibrium 210
4.3.A Cheap-Talk Games 210
4.3.B Sequential Bargaining under Asymmetric Information 218
4.3.C Reputation in the Finitely Repeated Prisoners' Dilemnia 224
4.4 Refinements of Perfect Bayesian Equilibrium 233
Index 257

Preface

This book is designed to introduce game theory who will later construct (or at least consume) game-theoretic models in applied fields within economics. The exposition emphasizes the economic applications of the theory at least as much as the pure theory itself.

The book can be used in two ways. For first-year graduate students in economics, many of the applications will already be familiar, so the game theory can be covered in a half semester course, leaving many of the applications to be studied outside of class. For undergraduates, a full-semester course can present the theory a bit more slowly, as well as cover virtually all the applications in class. The main mathematical prerequisite is single-variable calculus; the rudiments of probability and analysis are introduced as needed.

Editorial Reviews

"[A] lucid and detailed introduction to game theory in an explicitly economic context."

Cooperative Economic News Service

"Lucid and detailed introduction to game theory in an explicitly economic context."—Cooperative Economic News Service

From the Publisher