In the case of the kidnapping the embarrassing photo

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Microeconomics
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Chapter 11 / Exercise 4
Microeconomics
Arnold
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respect the terms of their contract. In the case of the kidnapping, the embarrassing photo would impose costs on the hostage if it were released, thereby ensuring that he will stick to his agreement not to reveal the identity of the kidnappers. When Strength Is Weakness Our next example comes from the world of animal psychology. It turns out that pigs quickly establish dominance-subordinateness relations, in which the dominant pig tends to boss the subordinate pig around. Some psychologists put two pigs, one dominant, one subordinate, in a long pen. 2 At one end of the pen was a lever that would release a portion of food to a trough located at the other end of the pen. The question of interest was this: which pig would push the lever and which would eat the food? Somewhat surprisingly the outcome of the experiment was that the dom- inant pig pressed the lever, while the subordinate pig waited for the food. The subordinate pig then ate most of the food, while the dominant pig rushed as fast as it could to the trough end of the pen, ending up with only a few scraps. Table 29.9 depicts a game that illustrates the problem. Dominant Pig Subordinate Pig Don’t press lever Press lever 0, 0 0, 5 4, 1 2, 3 Don’t press lever Press lever Pigs pressing levers. Table 29.9 2 The original reference is Baldwin and Meese, “Social Behavior in Pigs Studied by Means of Operant Conditioning,” ( Animal Behavior, (1979)). I draw on the de- scription of John Maynard Smith, Evolution and the Theory of Games (Cambridge University Press, 1982).
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Chapter 11 / Exercise 4
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Arnold
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558 GAME APPLICATIONS (Ch. 29) The subordinate pig compares a payoff of (0, 4) to (0, 2) and concludes, sensibly enough, that pressing the lever is dominated by not pressing it. Given that the subordinate pig doesn’t press the lever, the dominant pig has no choice but to do so. If the dominant pig could refrain from eating all the food and reward the subordinate pig for pressing the lever, it could achieve a better outcome. The problem is that pigs have no contracts, and the dominant pig can’t help being a hog! As in the case of the kindly kidnapper, the dominant pig has a commit- ment problem. If he could only commit to not eating all the food, he would end up much better off. Savings and Social Security Commitment problems aren’t limited to the animal world. They also show up in economic policy. Saving for retirement is an interesting and timely example. Everyone gives lip service to the fact that saving is a good idea. Unfortunately, few people actually do it. Part of the reason for the reluctance to save is that individuals recognize that society won’t let them starve, so there is a good chance they will be bailed out later on. To formulate this in a game between the generations, let’s consider two strategies for the older generation: save or squander. The younger genera- tion likewise has two strategies: support their elders or save for their own retirement. A possible game matrix is shown in Table 29.10.

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