ECON 3600
Assignment 7. Due Thursday, March 22nd
1. (Adapted from Bierman and Fernandez)
The Centipede Game is a twoperson dynamic game that is played as follows: There is a pot of
money. Initially, the pot has $2 in it. Player 1 moves first. He can either stop the game and take
all the money in the pot ($2) or let the game go to round 2. In round 2, money is added to the pot
so that now there are $2
2
= $4 in the pot, and Player 2 can either stop the game and take all the
money in the pot ($4) or let the game go on to Round 3. And so on. Player 1 moves in odd
numbered rounds. Player 2 moves in evennumbered rounds. In each round the pot grows so that
if the Nth round is reached the pot is worth $2
N
. The game ends when a player stops it or when
round 6 is reached. In round 6, Player 2 gets all the money in the pot and the game ends.
a. Draw the game tree for the Centipede Game.
b. Determine the subgame perfect equilibrium strategies for both players. What is the
equilibrium outcome?
The SPE is for each player to stop at every node. So, the outcome will be for player 1 to
stop in the first round.
c. In experiments with real money, where there is a constantly increasing pot (the pot has $N in it
at the Nth round) and the maximum number of rounds is 100, players go as long as 50 rounds
before somebody takes the pot. How does this compare to the equilibrium outcome you found?
How would you account for the experimental results?
This is not the SPE outcome. Perhaps people are altruistic or don't care about trivial
amounts of money (any reasonable answer is fine for this part).
Stop
Stop
Stop
Stop
1
1
1
2
2
2,0
0,4
8,0
0,16
32,0
0,64
Stop
Go
Go
Go
Go
Go
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View Full Document2. (From Yale Open Course) Information and Nuclear Safety. Consider the following game
involving two real players and a chance move by `nature'. America and Russia have the nuclear
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 Spring '12
 daniel
 Game Theory, Bob Anne, Goon Lorax Goon

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