CPO-2002 Lecture Notes - Lecture 9: Nash Equilibrium, Backward Induction, Subgame Perfect Equilibrium
Document Summary
A spne is a set of strategies such that each player plays a nash equilibrium in every subgame. We find spnes by using a method called (cid:862)(cid:271)a(cid:272)kward i(cid:374)du(cid:272)tio(cid:374). (cid:863) Players in the game care about the consequences of their choices and, therefore, think ahead. They try to anticipate how the other player will respond to their choices. Backward induction involves starting at the end of the game and reasoning backwards. Easy to see that the choice will depend on whether the exit benefit (e) is greater than 0. If e > 0, we say the citizen has a credible exit threat. Let"s assu(cid:373)e for (cid:374)ow that the (cid:272)itize(cid:374) has a (cid:272)redi(cid:271)le exit threat, that is, e>0. When responding to the choice of the state, the citizen must decide whether the benefit of loyalty (l) is greater than 1 (original benefit).
