101-20_07 - Econ 101 Lecture 20 Resolving Prisoner's...

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Resolving Prisoner's Dilemmas and Other Commitment Problems In games like the prisoner's dilemma, the hockey helmet game, the ultimatum bargaining game, and the satellite office game, players have trouble arriving at the outcomes they desire because they are unable to make credible commitments. Thus, if both players in the prisoner's dilemma could somehow reach a binding agreement to remain silent, each would be assured of getting a shorter sentence. Hence the logic of the underworld code of Omerta, under which the family of anyone who provided evidence against a fellow mob member would be killed. Likewise, the helmet rule results in a better outcome for hockey players by committing them to wear helmets in circumstances in which they would otherwise choose not to do so. Example 20.1. Will the restaurateur pay the waiter extra to provide good service? The restaurateur wants his waiter to provide good service so that customers will enjoy their meals and come back in the future. If the waiter provides good service, the owner can pay him $100 per day. But if the waiter provides bad service, the most he can pay the waiter is $60 per day. The waiter is willing to provide bad service for $60 per day, and for $30 extra would be willing to provide good service. The owner's problem is that he cannot tell whether the waiter has provided good service. What will happen? Restaurateur Waiter Pay waiter $100/day Pay waiter $60/day Provide bad service Provide good service Second best for each Third best for each Best for owner Worst for waiter Best for waiter Worst for owner Each side has a dominant strategy: Restaurateur- pay $60/day; waiter- provide bad service. Outcome is lower-right cell and that is inefficient. The tip is a solution to this commitment problem. The Mafia's code of silence, hockey helmet rules, tips for waiters-- all work by changing the material incentives facing the relevant decision makers. But it is not always practical to changes material incentives in precisely the desired ways. Example 20.2. Will Sylvester leave a tip when dining on the road? Sylvester has just finished a $100 steak dinner at a restaurant on Interstate 81 some 500 miles from home. The waiter provided good service. If Sylvester cares only about doing the best for himself that he can, will he leave a tip? Unlike case of restaurant with local patrons, waiter in this restaurant has no way to penalize the diner in the future if he leaves no tip. Diner Waiter Leave 15% tip Leave no tip Provide bad service Provide good service Second best for each Third best for each Best for diner Worst for waiter Best for waiter Worst for diner Dominant strategy for the waiter: provide bad service. Dominant strategy for diner: leave no tip. Again a worse outcome for each than if waiter had provided good service and diner had tipped. Moral Sentiments as Commitment Devices
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101-20_07 - Econ 101 Lecture 20 Resolving Prisoner's...

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