BUS 421 Study Guide - Final Guide: Credit Risk, Trigger Strategy, Nash Equilibrium
16 Dec 2017
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Chapter 8. 10 & 9: an analysis of conflict. Implicit contracts: when a firm"s past behaviour creates a valid expectation of outside parties that the firm will continue to behave with integrity. Non-cooperative games: the competitive interaction of two or more rational players when there is no formal contract. Cooperative solution: the ideal solution where both parties would be better off. Nash equilibrium: the predicted outcome and the only strategy pair where each player is content with his/her strategy. Trigger strategy: where parties enforces penalty for deviations from the cooperative solution in a multi-period (finite #) game. This only works when the discount rate of each player isn"t too high. Revelation principle: in any contract where a manager has incentive to lie, an equivalent contract can be designed to motivate truth-telling; certain conditions need to be met for the principle to hold. Methods of designing contract to control moral hazard: first-best contract.
