Game Theory for Applied Economists / Edition 1

by Robert Gibbons

Overview

An introduction to one of the most powerful tools in modern economics

Game Theory for Applied Economists introduces one of the most powerful tools of modern economics to a wide audience: those who will later construct or consume game-theoretic models. Robert Gibbons addresses scholars in applied fields within economics who want a serious and thorough discussion of game theory but who may have found other works too abstract.

Gibbons emphasizes the economic applications of the theory at least as much as the pure theory itself; formal arguments about abstract games play a minor role. The applications illustrate the process of model building—of translating an informal description of a multi-person decision situation into a formal game-theoretic problem to be analyzed. Also, the variety of applications shows that similar issues arise in different areas of economics, and that the same game-theoretic tools can be applied in each setting. In order to emphasize the broad potential scope of the theory, conventional applications from industrial organization have been largely replaced by applications from labor, macro, and other applied fields in economics.

The book covers four classes of games, and four corresponding notions of equilibrium: static games of complete information and Nash equilibrium, dynamic games of complete information and subgame-perfect Nash equilibrium, static games of incomplete information and Bayesian Nash equilibrium, and dynamic games of incomplete information and perfect Bayesian equilibrium.

Product Details

ISBN-13:	9780691003955
Publisher:	Princeton University Press
Publication date:	08/02/1992
Edition description:	Reprint
Pages:	288
Product dimensions:	6.00(w) x 9.25(h) x (d)

About the Author

Robert Gibbons is professor of organizational economics and the Sloan Distinguished Professor of Management at the Massachusetts Institute of Technology. He is the coeditor of The Handbook of Organizational Economics (Princeton).

Table of Contents

1	Static Games of Complete Information	1
1.1	Basic Theory: Narmal-Form Games and Nash Equilibrium	2
1.1.A	Normal-Form Representation of Games	2
1.1.B	Iterated Elimination of Strictly Dominated Strategies	4
1.1.C	Motivation and Definition of Nash Equilibriuin	8
1.2	Applications	14
1.2.A	Cournot Model of Duopoly	14
1.2.B	Bertrand Model of Duopoly	21
1.2.C	Final-Offer Arbitration	22
1.2.D	The Problem of the Commons	27
1.3	Advanced Theory: Mixed Strategies and Existence of Equilibriutn	29
1.3.A	Mixed Strategies	29
1.3.B	Existence of Nash Equilibrium	33
2	Dynamic Games of Complete Information	55
2.1	Dynamic Games of Complete and Perfect Information	57
2.1.A	Theory: Backwards Induction	57
2.1.B	Stackelberg Model of Duopoly	61
2.1.C	Wages and Employment in a Unionized Firm	64
2.1.D	Sequential Bargaining	68
2.2	Two-Stage Games of Complete but Imperfect Information	71
2.2.A	Theory: Subgame Perfection	71
2.2.B	Bank Runs	73
2.2.C	Tariffs and Imperfect International Competition	75
2.2.D	Tournaments	79
2.3	Repeated Games	82
2.3.A	Theory: Two-Stage Repeated Games	82
2.3.B	Theory: Infinitely Repeated Games	88
2.3.C	Collusion between Cournot Duopolists	102
2.3.D	Efficiency Wages	107
2.3.E	Time-Consistent Monetary Policy	112
2.4	Dynamic Games of Complete but Imperfect Information	115
2.4.A	Extensive-Form Representation of Games	115
2.4.B	Subgame-Perfect Nash Equilibriuin	122
3	Static Games of Incomplete Information	143
3.1	Theory: Static Bayesian Ganies and Bayesian Nash Equilibrium	144
3.1.A	An Example: Cournot Competition under Asymmetric Information	144
3.1.B	Normal-Form Representation of Static Bayesian Games	146
3.1.C	Definition of Bayesian Nash Equilibrium	149
3.2	Applications	152
3.2.A	Mixed Strategies Revisited	152
3.2.B	An Auction	155
3.2.C	A Double Auction	158
3.3	The Revelation Principle	164
4	Dynamic Games of Incomplete Information	173
4.1	Introduction to Perfect Bayesian Equilibrium	175
4.2	Signaling Games	183
4.2.A	Perfect Bayesian Equilibrium in Signaling Games	183
4.2.B	Job-Market Signaling	190
4.2.C	Corporate Investment and Capital Structure	205
4.2.D	Monetary Policy	208
4.3	Other Applications of Perfect Bayesian Equilibrium	210
4.3.A	Cheap-Talk Games	210
4.3.B	Sequential Bargaining under Asymmetric Information	218
4.3.C	Reputation in the Finitely Repeated Prisoners' Dilemnia	224
4.4	Refinements of Perfect Bayesian Equilibrium	233
Index	257

Preface

This book is designed to introduce game theory who will later construct (or at least consume) game-theoretic models in applied fields within economics. The exposition emphasizes the economic applications of the theory at least as much as the pure theory itself.

The book can be used in two ways. For first-year graduate students in economics, many of the applications will already be familiar, so the game theory can be covered in a half semester course, leaving many of the applications to be studied outside of class. For undergraduates, a full-semester course can present the theory a bit more slowly, as well as cover virtually all the applications in class. The main mathematical prerequisite is single-variable calculus; the rudiments of probability and analysis are introduced as needed.

Editorial Reviews

"[A] lucid and detailed introduction to game theory in an explicitly economic context."

Cooperative Economic News Service

"Lucid and detailed introduction to game theory in an explicitly economic context."—Cooperative Economic News Service

From the Publisher