This preview shows page 1. Sign up to view the full content.
Unformatted text preview: PADP 6950: Founda1ons of Policy Analysis Game Theory Angela Fer1g, PhD Game Theory Game theory is the study of how people behave in strategic situa1ons Relevant to policy analysis: Important in determining behavior in poli1cal nego1a1on Another theory which may explain how people/ firms make economic decisions 1 Prisoners' Dilemma Game between 2 criminals suspected of commiMng a crime The sentence that each receives depends both: If one confesses and other doesn't, one who remains silent is put in jail for long 1me (other gets off) If both confess, medium sentences If both silent, short sentences On his/her decision whether to confess/remain silent and On the decision made by the other Prisoners' Dilemma Strategic Form of the game Bonnie's Decision Confess Clyde's Decision Confess Silent (8,8) (20,0) Silent (0,20) (1,1) Note: (Clyde, Bonnie), value=years in jail 2 Nash Equilibrium Nash eqbm = situa1on in which each person chooses his/her best strategy given the strategies that the others have chosen Dominant strategy = a strategy that is best for a player in a game regardless of the strategies chosen by the other players (doesn't always exist) NE in Prisoners' Dilemma Bonnie's Decision Confess Clyde's Decision Confess Silent (8,8) (20,0) Silent (0,20) (1,1) If Bonnie remains silent, what is the best Clyde can do? If Bonnie confesses, what is the best Clyde can do? Symmetric game so the same for Bonnie What is the NE in this game? What would be best for both (min total years in jail)? 3 Policy Applica1on: Cer1ficate of Need (CON) laws CON laws are state laws that prohibit building of new capacity or purchase of expensive equipment without govt approval Hospitals don't have big economies of scale, not natural monopolies, where less compe11on is be`er So, why is there a regula1on like CON which restricts compe11on by limi1ng spending on new technology (capital) by hospitals? One answer: Medical arms race Story: If 2 hospitals adopt technology, revenues will be low because of compe11on If both don't adopt, revenues high because no compe11on and no expense laid out If one adopts and other doesn't, adopter gets everything and other loses Strategic Form of the game ((ARMC , SM ) ARMC Adopt Don't St. Marys Adopt Don't (100,100) (200,-50) (-50,200) (150,150) 4 NE in medical arms race ((ARMC , SM ) ARMC Adopt Don't St. Marys Adopt Don't (100,100) (200,-50) (-50,200) (150,150) If ARMC doesn't adopt, what is the best SM can do? If ARMC adopts, what is the best SM can do? Symmetric game so the same for SM What is the NE in this game? What would be best for both (max profit)? Policy implica1on Why are there CON laws which restrict capital investments of hospitals? MAR leads to excess capacity and therefore higher costs MAR can cause unnecessary services and poten1ally increased adverse pa1ent health outcomes 5 ...
View Full Document
- Spring '11