ECON 313 Lecture Notes - Lecture 4: Nash Equilibrium, Embezzlement

• School: McGill University
• Department: Economics
• Course: ECON 313
• Professor: Matthieu Chemin

Document Summary

Institutions are humanly devised constraints that shape social interactions. Facilitating cooperation between private actors, gains from trade. There are different types of institutions: political, economic, legal, and social. Tit fo(cid:396) tat st(cid:396)ateg(cid:455): i"ll (cid:374)e(cid:448)e(cid:396) steal f(cid:396)o(cid:373) (cid:455)ou (cid:271)ut if (cid:455)ou steal f(cid:396)o(cid:373) (cid:373)e o(cid:374)(cid:272)e i"ll (cid:374)e(cid:448)e(cid:396) do (cid:271)usi(cid:374)ess with you again. This solution is only credible if there are other potential partners. Payoffs for the other player: if cooperates 1(cid:1004)+(cid:1005)(cid:1004)+(cid:1005)(cid:1004)+ (cid:894)i(cid:374)fi(cid:374)ite s(cid:373)all pa(cid:455)off(cid:895) If infinite small payoff> one big payoff, then the solution is self-enforcing. Problem: the game is not infinite therefore using backward reasoning; no matter what you play the other player will play d at the last round. In the 11th century there was long distance trade, traders operated through overseas agents. There was risk of embezzlement, no legal system, and information asymmetry. The punishment strategy was: the offended merchant would tell all his trader friends about the agent.