Explain how positive or negative externalities exist in the prisoners’ dilemma
o If I defect => negative externality for my opponent
o If my opponent cooperates => positive externality for me
How many equilibria are there in this game? Are any Pareto inefficient?
o One – defect, defect
o NE is not Pareto efficient. Pareto efficient outcome would be mutual
One aspect of a coordination game is that there are multiple equilibria. Is
society’s choice of the arrange of the arrangement of letters on a typewriter a
o Yes, keyboard manufacturers design QWERTY keyboards.
o All users then learn how to type the QWERTY system
In a stag hunt game two hunters stand on either side of a path, waiting for a
stag to approach. Nearby are some rabbits. Each hunter decides whether to
abandon the stag hunt and kill a rabbit or help his or her fellow hunter kill a
stag. If both hunters choose option 2, they kill the stag and split it between
them. This is the most preferred outcome of both hunters. The second most
favored outcome of a hunter is if he chooses 1 and takes home a rabbit. The
least preferred outcome of a hunter is if he chooses 2 but his partner chooses
1. In this case he takes nothing home. What is the equilibrium or equilibria to
o Two equilibria: (rabbit, rabbit) and (stag, stag)
In what ways is a pay-raise vote in a legislature like a prisoners’ dilemma?
o A legislator voting against the pay-raise is a negative externality for
o A legislator voting for the pay-raise is a positive externality for me
o Incentive to defect if there is a voting coalition in favor
In what ways is a pay-raise vote like a stag hunt?
o There are multiple equilibria
o Some everyone prefer others
Suppose a legislature of 101 members is voting on a pay raise. What is the
equilibrium or equilibria to the game?
o One equilibrium: 51 yeas and 50 nays
o Other: everyone votes nay
Describe any coordination problems in this game?
o Which 51 voters support it?
In 1991 how did the Senate solve these coordination problems?
o 51 to 48 vote so it didn’t seem pivotal. But how do you pick the 51