ECON 4180 Lecture Notes - Lecture 9: Subgame Perfect Equilibrium, Solution Concept, Discounting
28 Mar 2016
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We learned the solution concept of the subgame perfect nash equilibrium. (still remember, right?) Let us apply this analytical tool to sequential bar- gaining games in which players alternative their turn of making a take-it-or- leave-it o ers. 1 ultimate games: power to the proposer: two players, i = 1, 2 move sequentially. Player 1 o ers (1 m, m) to player 2 where m means player 2"s share: if player 2 accepts, then the payo s are given as (1 m, m). If player 2 rejects, the disagreement point is (0, 0). Derive the subgame perfect nash equilibrium of this game, assuming that player 2 will accept the o er m = 0 which is indi erent to the default payo . If player 1 rejects, then both obtain 0: we assume that player 1"s discount factor is 1 and player 2"s discount factor is 2. Derive the subgame perfect nash equilibrium of this game.
