Lect 9 - Commitment Problems IRL

Social DIlemmas

If everyone acts rationally, you are stuck and it is a socially sub-optimal outcome

NOT ALL COORDNITATION PROBLEMS ARE SOCIAL DILEMMASSS!!!!

Extensive Form

In the tree, Ben gets to observe Arin’s choice before making his own

Backwards Induction

thinking ahead and going backwards. each node, we identify best response. best response anticipates how actors respond further down the tree

Sub-game Perfect Nash Equilibrium

refinement of nash equilibrium in dynamic games

Even if Ben promises to stay silent…

it is still a social dilemma because they cannot trust the other will follow through in favor of their own personal interest. its if future behavior is believable

Actors : you and random

Info : complete info

Choices : you choose to buy or refrain

If you buy, rando chooses cheat,honor

What is incentive of toilet paper?

Given aminoity, no enforcement, they have a strong temptation to pocket the cash

Deal seems failed from the start because?

You anticipate the commitment problem of the selltr after he gets paid

Commitment Problem

they may strike a deal now, but ex-post incentives want them to defect from an agreement (contract)

Why can’t they trust either party?

They have a larger payoff if they were to deviate from what the first player would want to do

It leaves two parties worse off because..

they anticipate that party B will lead to explotation. it leads to inaction even though it’d be better for both of them if they could trust one another

Hold-up Problem

lack of credible commitment leads to inefficient low levels of investment

What makes it risky for manufacturers?

Invest could be profitable for supplier but the buyer could negotiate after the fact and screw over the supplier. supplier has already sunk the cost, the investment made them vulnerable

Even if they investment would be possible…

alice avoids the risk of being exploited. the fear of the commitment problem prevents the good thing from happening. individual rational option leaves them worse off at the start

How did the silk road have a commitment problem?

Anonymous buyers makes it so there would be incentive to cheat.

Fundamental problem of exchange

How do you ensure both sides follow through?

If no one buys…

sellers can’t sell. market could fail because there is no trust and there are commitment problems. mutual beneficial transaction never happened from fear of betrayal

How did they fix he commitment problem?

Automated rating system, buyers could rate. There were discussion forms that could vouch. Seller who ripped people off, no one would buy from them. Made an incentive to maintain reputation

Escrow system : employed a neutral third party that held the funds after the buyer received the goods and were satisfied. They don’t get paid until they deliver

Explicit rules against fraud and enforced and banned cheats.

State structures that silk road tried to operate outside of…

they had to create petty versions of the governments they were avoiding. underscores the fundamental role of institutions - rules of the game. formal like property rights, laws

informal : social norms, reputation, shared expectations

formal and informal : establishes consequences, costly to cheat. by making deceit more costly, institutions create trust that others will follow through on their promises even if they may not want to later on

Knowing that something bad could happen..

it would be better off if we trusted eachother and cooperated

To solve IRA commitment problem..

Make an agreement (good friday) that allows both unionists and nationalist to have parts in the government

Fundamental problem of exchange

if the seller is anticipated to cheat, buyer never wants to purchase and the market fails

How do institutions fix this?

Tie the actors hands.

Create neutral courts to remove temptations of breaking the promise

Rational Pigs (Dom) and (Sub)

If neither presses lever, no one eats

If dom pushes it, sub eats most of the food

If sub presses it, dom pig eats all

If both press, eat small priton