Game Theory

allocation

A description of who does what, the consequences of their actions, and who gets what as a result. [5.2]

altruism

The willingness to bear a cost in order to benefit somebody else. [4.0][13.5][KC4]

asymmetric information

Information that is relevant to the parties in an economic interaction, but is known by some but not by others. [6.10][10.4][KC10]

bargaining power

The extent of a person's advantage in securing a larger share of the economic rents made possible by an interaction. [5.1][16.3][KC4][KC14]

best response

In game theory, the strategy that will give a player the highest payoff, given the strategies that the other players select. [4.2][KC4]

cooperation

Participating in a common project that is intended to produce mutual benefits. [4.9]

coordination game

A game in which there are two Nash equilibria, of which one may be Pareto superior to the other. [13.7][KC12]

costs of entry

Startup costs that would be incurred when a seller enters a market or an industry. These would usually include the cost of acquiring and equipping new premises, research and development, the necessary patents, and the cost of finding and hiring staff. [8.6]

dominant strategy

Action that yields the highest payoff for a player, no matter what the other players do. [4.2]

dominant strategy equilibrium

An outcome of a game in which every player plays his or her dominant strategy. [4.2][KC4]

dominated

We describe an outcome in this way if more of something that is positively valued can be attained without less of anything else that is positively valued. In short: an outcome is dominated if there is a win-win alternative. [2.4][20.3]

economically feasible

Policies for which the desired outcomes are a Nash equilibrium, so that once implemented private economic actors will not undo the desired effects. [NO INFO ON THIS ONE.][KC]

free ride

Benefiting from the contributions of others to some cooperative project without contributing oneself. [4.0][4.5]

game

A model of strategic interaction that describes the players, the feasible strategies, the information that the players have, and their payoffs. [4.1][KC4]

game theory

A branch of mathematics that studies strategic interactions, meaning situations in which each actor knows that the benefits they receive depend on the actions taken by all. [4.1]

hidden actions (problem of)

This occurs when some action taken by one party to an exchange is not known or cannot be verified by the other. For example, the employer cannot know (or cannot verify) how hard the worker she has employed is actually working. [12.6][14.6]

hidden attributes (problem of)

This occurs when some attribute of the person engaging in an exchange (or the product or service being provided) is not known to the other parties. An example is that the individual purchasing health insurance knows her own health status, but the insurance company does not. [12.6][14.6]

median voter

If voters can be lined up along a single more-versus-less dimension (such as preferring higher or lower taxes, more or less environmental protection), the median voter is the one 'in the middle'—that is (if there is an odd number of voters in total), with an equal number preferring more and preferring less than what he or she does. [22.6]

median voter model

An economic model of the location of businesses applied to the positions taken in electoral platforms when two parties compete that provides conditions under which, in order to maximize the number of votes they will receive, the parties will adopt positions that appeal to the median voter. [22.6]

minimum acceptable offer

In the ultimatum game, the smallest offer by the Proposer that will not be rejected by the Responder. [4.10][12.2]

Nash equilibrium

A set of strategies, one for each player in the game, such that each player's strategy is a best response to the strategies chosen by everyone else. [4.13][13.7][KC4]

Pareto criterion

According to the Pareto criterion, a desirable attribute of an allocation is that it be Pareto-efficient. [5.9]

Pareto dominant

Allocation A Pareto-dominates allocation B if at least one party would be better off with A than B, and nobody would be worse off. [5.9]

Pareto efficiency curve

The set of all allocations that are Pareto efficient. Often referred to as the contract curve, even in social interactions in which there is no contract, which is why we avoid the term. [5.8][KC5]

Pareto efficient

An allocation with the property that there is no alternative technically feasible allocation in which at least one person would be better off, and nobody worse off. [5.2][7.7][KC5]

Pareto improvement

A change that at least benefits one person without making anyone else worse off. [5.9][KC]

payoff

The benefit to each player associated with the joint actions of all the players. [4.1]

prisoners' dilemma

A game in which the payoffs in the dominant strategy equilibrium are lower for each player, and also lower in total, than if neither player played the dominant strategy. [4.3][KC4]

procedural judgements of fairness

An evaluation of an outcome based on how the allocation came about, and not on the characteristics of the outcome itself, (for example, how unequal it is). [5.3][KC5]

reciprocity

A preference to be kind or to help others who are kind and helpful, and to withhold help and kindness from people who are not helpful or kind. [4.7][KC4]

reservation option

A person's next best alternative among all options in a particular transaction. [2.3][5.7][KC2]

sequential game

A game in which all players do not choose their strategies at the same time, and players that choose later can see the strategies already chosen by the other players, for example the ultimatum game. [4.10]

simultaneous game

A game in which players choose strategies simultaneously, for example the prisoners' dilemma. [4.10]

strategic interaction

A social interaction in which the participants are aware of the ways that their actions affect others (and the ways that the actions of others affect them). [4.1]

strategy

An action (or a course of action) that a person may take when that person is aware of the mutual dependence of the results for herself and for others. The outcomes depend not only on that person's actions, but also on the actions of others. [4.1]

willingness to accept (WTA)

The reservation price of a potential seller, who will be willing to sell a unit only for a price at least this high. [8.1]

willingness to pay (WTP)

An indicator of how much a person values a good, measured by the maximum amount he or she would pay to acquire a unit of the good. [7.4][8.1][KC7]

zero sum game

A game in which the payoff gains and losses of the individuals sum to zero, for all combinations of strategies they might pursue. [4.4]