UnilateralNotes

UnilateralNotes - UNILATERAL After class yesterday, I was...

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UNILATERAL After class yesterday, I was asked a question about our screening analysis that I want to address. First, some context: A Nash equilibrium is a strategy profile such that no player has a positive incentive to unilaterally change their strategy - so everyone else keeps their strategy unchanged . But in showing that, for example, there is no Nash equilibrium with pooling, where we looked at a diagram like this: we said we couldn’t be at the pooling outcome (w ,t ) and still be at a Nash equilibrium, because 00 (1) at that point each firm has 0 profit [everyone chooses the same contract and the wage = E[ è ], (2) If one of the firms, say Firm #2, stops offering (w ,t ) and instead offers ( w Þ , t Þ ), then Firm #2 will be strictly better off, their profit will become strictly positive. Why? Because in response to those new contract possibilities, H-type workers will choose ( w Þ , t Þ ) over (w ,t ) and L-type workers will continue to choose (w ,t ). This results in positive profits for Firm #2 since they
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This note was uploaded on 01/13/2012 for the course ECN 611 taught by Professor Kelly,j during the Fall '08 term at Syracuse.

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UnilateralNotes - UNILATERAL After class yesterday, I was...

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