Problem+set+2 - Make a loan (financing some worthy...

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01:790:103 Professor Douglas Blair Introduction to Comparative Politics Fall 2009 Problem Set #2 Due at the beginning of recitation section, October 21-23 1. Find the Nash equilibria and the corresponding payoffs for the game illustrated at right. Find the subgame perfect Nash equilibria. Are any of the Nash equilibria you find more plausible predictions than others? 1 2 2 U D H M L T B 3, 4 2, 5 5, 1 1, 2 4, 3 2. The World Bank can make a development loan to the government of Raritania, a developing nation. Such loans typically come with conditions requiring that the recipient implement anti-corruption or other reforms. Raritania can reform or ignore the demand for reform, which in the absence of the loan it would resist. If the government fails to reform, the World Bank can punish the recipient or decline to implement such punishment. The World Bank’s preferences among the possible outcomes are, from best to worst:
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Unformatted text preview: Make a loan (financing some worthy development project) and have the reform implemented. Make a loan (financing the project) but not have the reform implemented and not punish the recipient. Make no loan. Make a loan (financing the project) but not have the reform implemented and punish the recipient. Raritanias preference ranking is: Receive a loan, decline to reform, and escape punishment. Receive a loan, implement reform, and escape punishment. Receive no loan. Receive a loan, decline to reform, and be punished. Draw a suitable game tree for this strategic interaction. Label the terminal nodes with payoffs for the two players that are consistent with the preference rankings. Find the subgame perfect Nash equilibrium of the game. Discuss your result briefly. 3. Clark, Golder, and Golder, Problem 6.3 (i.e., Chapter 6, Problem 3) 4. Clark, Golder, and Golder, Problems 7.1 and 7.2...
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