Unformatted text preview: iple to check if this is a SPE. In the cooperation
mode according to the strategy proﬁle both players will always play Chicken. This yields present
value of 3/(1 − δ ) to each player. If player i deviates in period t and plays Lion, his payoﬀ increases
to 4 in that period. In period t + 1, according to the strategy proﬁle they go to P i mode. In
P i mode player i plays Chicken while the other player plays Lion. Then in the next period they
go back to the Cooperation mode. This yields a present value of 4 + 1δ + 3δ 2 /(1 − δ ). Players
don’t want to deviate if 3/(1 − δ ) > 4 + 1δ + 3δ2 /(1 − δ ) ⇔ δ > 1/2.Since P1 and P2 modes are
symmetrical we only have to verify for one of these modes. In mode P1 player 1 plays Chicken
while the other player plays Lion. This is a NE of the stage game. Since in the next period they
go back to the Cooperation mode regardless of the actions, neither player wants to deviate. If
player 1 does not deviate his present payoﬀ is 1 + 3δ/(1 − δ ). If he deviat...
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This document was uploaded on 03/21/2014 for the course ECON 14.12 at MIT.
- Fall '04
- Game Theory