HO10F10 - GAME THEORY IN THE SOCIAL SCIENCES Bargaining...

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G AME T HEORY IN THE S OCIAL S CIENCES Bargaining between a Plaintiff and Defendant with Incomplete Information In class on Tuesday (11/13), we worked through a bargaining problem between a plaintiff, P , and a defendant, D . After much work, we said that the optimal settlement offer was s = 35. As some students realized, the probability that this offer would be accepted would be [40-(50-s)]/20 = 25/20 = 1.25! But probabilities have to be between zero and 1, so this cannot be correct. What went wrong? Where did the professor screw up? The short answer is that the optimal offer is a “corner solution” and we did not check for this in class. Checking for corner solutions can be long and tedious. In the artificial setting of class, e.g., in problems sets, midterms, finals, and at least in principle in examples done in lecture, we will not take the time to check of corner solutions because the problems should be designed so that the optimal offers are not corner solutions. In the real world outside class, you should always check for corner solutions.
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HO10F10 - GAME THEORY IN THE SOCIAL SCIENCES Bargaining...

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